Subsidies to Import Essential Goods Fail to Curb Price Hikes

EghtesadOnline: The rise in the retail prices of goods that used the government’s subsidized foreign currency at a rate of 42,000 rials per US dollar (about three times cheaper than the market rate) was no less than in other consumer goods.

News ID: ۷۴۶۳۲۰

11 December 2018

Last week, Mohammad Baqer Nobakht, the head of Plan and Budget Organization of Iran, announced that the government will continue to allocate subsidized foreign currency to essential goods next year (March 2019-20) to cushion the blow of inflation on Iranian households.

"As much as $14 billion will be spent on subsidizing the imports of essential goods as per the budget bill of next year," Financial Tribune quoted Nobakht as saying.

But how effective has this policy been? Figures released by two official providers of macroeconomic data in Iran, namely the Central Bank of Iran and the Statistical Center of Iran, show that the answer to the above question is “hardly”, a report by the Persian daily Donya-e-Eqtesad shows.

The government has placed 25 items on the list of imported essential goods, for which it provides subsidized foreign currency. They include rice, wheat, frozen red meat, fresh red meat, chicken, egg, soymeal, corn, barley, livestock medicine, chemical fertilizers, pesticides, seeds, raw sugar, edible solid and liquid fats, raw vegetable oils, legume (lentils, split peas, peas and beans), oilseeds, heavy tires, publication paper, newsprint, paper pulp, dried tea, medicines and medical equipment, and agricultural machinery.

The central bank provides retail prices of food items in Tehran on its website on a weekly basis. The first such report in the current year (March 2018-19) pertained to retail prices during the week ending April 13 and the latest one was the retail prices of food items during the week ending Nov. 30.

The prices of food items indicate that only the price of lentils in legume group have survived the inflation while the other items saw significant price rises during the period. For example, eggs, red meat, chicken and vegetable oil have all seen a price increase of above 35%.

The average goods and services consumer price index allows the comparison of price rises for items that did not receive the government’s subsidized currency with those that used the subsidized currency.

According to the central bank’s figures, the average goods and services CPI increased by 32.9% during the period. Therefore, it can be concluded that the injection of subsidized dollar failed to help stabilize the prices.

Monthly reports by the Statistical Center of Iran on food prices also confirm this result. Retail price increases have been reported for all food items over the eight months.

The slowest price rise has been cited for lentil with 10% and the biggest increase has been registered for veal with 50.7%. The overall consumer inflation has increased by 30.9% over the period, according to SCI figures.

By phasing out the ineffective essential goods’ subsidies, the government can ease the pressure of US sanctions as a result of reduced oil revenues or it can finance anti-poverty schemes, the report concluded.