The poor and the gasoline price hike
Since the announcement of the gasoline price hike on Friday November 15, events in Iran have taken a tragic turn with loss of life and destruction of property. They also took a perplexing turn. Three days after the price increase and the vague promise of cash compensation for the price hike, on Monday the government announced it was putting the promised money into people’s bank accounts. If the compensation scheme was ready, why not announce it with the price increase? I am not sure if it would have prevented the unrest altogether, but at least there would have been one fewer grievance. (more…)
Food consumption of the poor in Iran
It is now clear that the purpose of US sanctions against Iran is to make its people miserable enough so they pressure their government to agree to US demands. One obvious response to this strategy is for the Iranian government to shift resources to groups most likely to feel and transmit these pressures. If the government has a such a plan, who to protect and how, it seems lost in the chaos of the exchange rate market and reshuffling of government ministers. Perhaps the past can be a guide: how did Iran manage the last phase of sanctions, when, in July 2011, President Obama ratcheted them up.
Poverty and living standards in Iran after the nuclear deal
Many observers in the West have been quick to blame the recent unrest in Iran on high and rising poverty, which is in turn seen as a failure of the Iran nuclear deal (also known as the JCPOA), or the squandering of its windfall. President Hassan Rouhani sold the nuclear deal to voters, who have elected him twice, as the only way he could improve their lives. The unrest taking place in Iran’s smaller cities suggests that this promise is far from realized. As I have written before, there is little doubt that the economy rebounded after JCPOA, but did poverty and the living standards of ordinary Iranians also improve with this economic recovery? (more…)
Will Rouhani complete the reform of subsidies?
In principle, the answer to this question should be yes. Rouhani’s administration professes to be pro-market and is eager to shift resources from wasteful consumption to economic growth. What better way to remove energy subsidies and use the proceeds to fund the cash-starved development budget? (more…)
Inflation and energy price reform in Iran
The dominant view of the high inflation of the last three years blames it on the subsidy reform. (The latest high profile assertion to this effect came from a piece by Hashem Pesaran and Hadi Salehi Esfahani published by the Fars News Agency, to which Mohammad Ali Farzin, the former head of the subsidy reform program, responded by claming that only 10% of the inflation was due to the subsidy reform). Were it not for the fact that blaming energy prices for the destructive inflation of the last three years casts a long shadow over future policy on energy prices, the mere fact that it is wrong would not prompt me to bore the readers of this blog with yet another post on inflation. (more…)
Transfers in kind: learning the old lessons, again
President Rowhani has received well-deserved high marks in foreign policy for his management of the tough negotiations with P5+1 in Geneva, but his first attempt at dealing with Iran’s broken social protection system does not deserve a passing grade. I explain this in my latest post at Iran Matters. The food distribution plan that, according to an editorial in the conservative Keyhan newspaper, “could have been a gesture that the government cares about the poor … but instead it turned into insult and humiliation.”
The government seems to have made a hasty decision that transfers in kind are superior to cash, despite evidence to the contrary, as I argued in a recent post here. Tadbir, which is the motto of Rouhani’s government and translates into prudence and experience in Persian, should include economics research and the experience of other countries. Are there channels for this type of information to find its way into Iran’s policy circles?
In defense of unconditional cash transfers
Iran’s subsidy reform program of 2010 depended heavily on a monthly cash transfer for its social acceptance. About 450,000 rials per person has been paid to all Iranians every month since then without any condition, so people were free to do whatever they wanted with the money. We know little about what they actually did, but there is a sense in Iran that this was not the best way to redistribute the energy subsidies.
There is much talk of improving the targeting of the cash transfer program, but less motivated by a desire to improve its equity than by the desire to cut the program’s cost. The most talked about proposal is to limit payments to the poorer households only, for example, to the bottom 7 deciles. I have already warned in this blog that this is impractical, arguing that identification of people in the top three deciles is very difficult and likely not worth the cost. I believe that the same amount could be raised by some very practical measures, such as charging more for the gasoline sold to consumers in richer neighborhoods and with more expensive cars. (more…)
Saving the subsidy reform program
Ever since it took over the reigns of government in August, President Rouhani’s administration has been grappling with the challenge of closing the huge gap in the government budget that it has inherited from its predecessor, reportedly at about 800 trillion rials (about $33 billion) or more than one third of planned expenditures. This is no small challenge given the fact that half of the year is over and much of the expenditures have already taken place or been committed. So, to reduce the deficit the government has little choice but to raise revenue. Luckily, inflation started to slow down just before Rouhani took over and has stayed below the 20% annual rate for the last three months, down from twice that rate in previous months. The bad news is that the most praiseworthy of the Ahmadinejad programs, the subsidy reform, is in deep deficit. The program has other problems besides its revenue gap, but it is on life support and the chord will be cut unless this problem is taken care of. Good solutions are there, all involving further adjustment in prices, but to implement them the government needs to show courage. The idea that has been floating for some time to cut the payments to richer consumers is appealing but not practical.
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Inflation and money supply in Iran: a closer look
Last week, in a post on the Lobelog.com I noted further signs of moderating inflation. Prices in the Iranian month of Dey (ending 20 January 2013) rose by 1.7%, compared to 2.5% the month before and 4.5% per month in the previous two months after devaluation. These are high rates of inflation on an annual basis (see chart below), but a sign that the Central Bank may have found a way to keep the growth of money supply below the rate of inflation. I was curious enough if this were the case to look up money supply data published by the Central Bank and here is what I found. For the quarter that ended on December 20, 2012, which covers the three month period after devaluation, the rate of growth of money supply was 20 percentage points below the rate of inflation. (more…)
Iran’s Inflation showing signs of moderating
The Central Bank of Iran has just released the Consumer Price Index for the month of Azar (ending on November 20, 2012), and it shows a much smaller increase in prices than the previous two months. The index rose by about 4.5% per month during the last two months (equal to 70% annually), but its pace moderated in Azar, rising by 2.5%. This is still a sizable increase (about 35% annually), but it may be a sign that the large devaluation of the rial during the last week of September has run its course and consumers maybe back in the territory that, unfortunately, they have come to regard as normal: prices rising by about 20% per year. This is, of course, conditional on no new shocks happening to the exchange rate or the money supply in the near future. (more…)
Tyranny of numbers 
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