Tyranny of numbers

The gasoline price hike of November 15 triggered widespread violent protests in Iranian cities.  Three days later the government announced that it would increase the amount of cash transfers to compensate for the price increase and soften its blow.  But do the new transfers adequately compensate for the gasoline price increase? My estimates below show that they more than compensate those in the bottom 40 percent of the population — generally considered to be the vulnerable part of the population — while the top 40 percent lose.  Most people in the middle break even.

Estimating the net effect of the increase in the price of gasoline and cash transfers is not straightforward.  Unlike the 2010 cash transfers initiated by President Ahmadinejad as part of his subsidy reform program, the new transfers are implemented in a complex way.  Instead of universal and uniform per person transfers, they are intended for people in the bottom 70 percent of the income distribution, and are less than proportional to family size.  A single member family receives 55,000 toman (555,000 rials, about $20 PPP) per month, with smaller increases for additional members that go to zero for households larger than 5.  Given ambiguities in who is in the bottom 70 percent and how household size is measured, it is difficult to get a precise count on the number of recipients and on how the new cash transfers will impact living standards and the poverty rate in coming months and years.

If household size were to follow the census and survey definitions, which are based on a common expenditure pool rather than familial links, close to one million people would be excluded because they live in families with more than five embers, but in the 2010 program some households split when registering for the transfers.  For example, son or daughter in laws often opted for separate cash transfer accounts.  The same may happen now.

With a few reasonable assumptions and using household size as reported by the Household Expenditure and Income Survey (HEIS) of the Statistical Center of Iran, we can use the survey for 2018 to estimate the size of the net transfer for each household in 2019.

I first inflate daily per capita expenditures (pce) observed in HEIS 2018 by the CPI to simulate the distribution of expenditures in 2019. To these I add the amount of transfer per person (550,000 rials for a family of one with increments for larger families up to a family of five) and subtract from them the increase in expenditures on gasoline. I use gasoline consumption in 1397 to decide the level of the price hike for rationed and free market gasoline.

In Table 1 below, “PCE” is the value of the pce in 2018 inflated by the consumer price index (CPI).  So, for the bottom 20 percent of the population pce averaged to 11,400 toman per day (about $5 PPP), net change in income was 12,541 toman and “PCE after” are the same averages after adding the amount of transfer and subtracting the increase in gasoline expenditures.  For the bottom quintile, this is nearly 10 percent larger.  The averages for the amount of transfer and the net change show that the bottom 60 percent of the population, the intended target of cash transfers, do benefit from the program while the top 40 percent lose.  Per capita expenditures of the bottom 20 percent, most of whom are classified as poor according to the World Bank $5.5 PPP daily poverty line, will increase by 9.9 percent. This is a sizable gain that can reverse the rising trend in poverty that I documented in my last post.

In these calculations the government does not come ahead, so after paying the transfers there is not much left to cover its deficit, if that was part of the plan.

Table 1. Simulation of per capita expenditures with and without the Rouhani subsidy reform

Notes: Quintiles of per capita expenditures; “PCE” is pce in 2018 inflated by the CPI; “Transfer is the average cash transfer for the quintile; “Net change is the difference between transfers and additional gasoline expenditures; “PCE after” is PCE plus the net change; and the last column is the ratio net change to PCE.

The new transfers also make a difference for the poverty rate, cutting it by 2.6 percentage points, much of it in rural areas (see Table 2).   Over two million people can move out of poverty (as defined by a poverty line of $5.5 PPP and a PPP rate of 25000 rials per USD).  Note that the average decrease in poverty for the entire current year will be smaller than indicated in Table 2 because the program will only affect incomes for the last 4 months of the Iranian year 2019/2020 which ends in 20 March 2020.

Table 2. Estimated poverty rates before and after the gasoline price hike and cash transfers

Notes: Annual expenditures are adjusted for transfers minus additional expenditures on gasoline.

In short, these simple calculations show that, for the poorest 20 percent, the net effect of the gasoline price hike and transfers is positive and noteworthy.  For the middle class it is a wash and for the higher income quintiles, who have been the principal beneficiaries of cheap gasoline for decades, it is time to pay up.