Impact of Import Subsidy on H1 Food Price Fluctuations

EghtesadOnline: The average price growth of goods and services was around 10% during the first half of the current Iranian year (March 21-Sept. 22).

News ID: ۷۴۸۶۳۳

06 October 2019

Overall, 17 out of 24 food items experienced an inflationary boost of above 1% while six items posted negative inflation rates during the period, according to the Statistical Center of Iran.

Four subgroups of red meat, butter, pulses and imported tea have been taken off the list of import items receiving the government subsidized currency at the rate of 42,000 rials per US dollar since the beginning of the year.

A comparative overview of these items’ inflation rates from the Iranian month ending March 20 to the month ending Sept. 22 shows that their price growth was generally lower than the average H1 inflation, Financial Tribune reported.

The analysis of Persian daily Donya-e-Eqtesad shows the removal of government subsidies in the form of cheap foreign currency for food imports had little, if any, effect on their prices in the domestic market during the first half of the current Iranian year (March 21-Sept. 22).

According to the SCI report, 17 out of 24 food items saw inflation rates rise by over 1% while six items posted negative inflation rates in the period.

Due to seasonal price movements in the fresh fruit and vegetables subgroup, domestically-grown oranges witnessed the highest growth of 109.3% last month ending Sept. 22 compared with the month ending March 20, 2019. It was followed by packed imported tea with an increase of 71.2% from around 320,000 rials ($2.7) to 550,000 rials ($4.8).

Prices of Iranian rice also saw a significant rise over the six-month period: They climbed from 166,000 rials ($1.4) per kilogram to 232,000 rials ($2), indicating a 40% rise.

The prices of imported rice remained unchanged over the period. Apparently, government subsidies had been effective in keeping prices of this staple stable.

The year-on-year price increase of imported rice has been around 7.9%, which is lower than the average point-to-point inflation.

In the vegetables group, potato experienced the highest price rise over the six-month period of about 32.7%. Year-on-year inflation of potato was 101%, suggesting that its prices have doubled over a year.

H1 saw prices of dairy products increase significantly as well: Milk and yogurt prices increased 22.1% while Iranian cheese prices grew 18%. Such a rise came, despite the government’s allocation of subsidized currency for importing livestock feed.

The consumer prices of red meat group increased by 5% for lamb and 2.8% for beef whereas the year-on-year inflation of these two items climbed by 79.5% and 67.5% respectively.

Since March 21, red meat importers have not received subsidized currency, which indicates the removal of these items from the list of subsidy-receivers had little impact on their prices. However, the supply of domestic products has improved red meat market balance.

Pulses, which have been removed from the subsidies list, saw a double-digit inflation rate over the six-month period. Pinto bean prices rose 15.5% in H1 from 146,000 rials ($1.2) to 167,000 rials ($1.4) and lentil prices increased 12.2%. Pinto bean and lentil prices rose 31% and 19% respectively over the year ending Sept. 22.

Butter prices saw a 1.6% increase over H1, lower than the average inflation. The prices of imported tea, after its removal from the list of subsidy receivers recently, increased by 70% in H1.

Sugar and lump sugar group rose from 68,000 rials (59 cents) per kilograms six month ago to 76,000 rials ($66) last month, indicating an 11.4% rise. Lump sugar prices rose 55.4% over the year ending Sept. 22. However, prices of sugar rose 1.4% over the six-month period. Sugar is included among items that enjoy state subsidies, yet its prices grew 50.7% over the past year.

Vegetable oil, another subsidized food item, saw its consumer prices rise 7.7% in H1 and 30% over the past year. Subsidized currency has been patently not that effective in controlling the price increases of this subgroup.

Tomato paste is among food items greatly influenced by changes in the prices of its raw materials. Tomato prices decreased by 44.5% in H1, but such a deflation did not bring down the tomato paste prices; costs related to labor force, energy, technology and transportation had seemingly more impact on the prices of tomato paste.

The price of a kilogram of tomato paste rose 11.2% in H1 and 134.9% in the year ending Sept. 22. Manufacturers believe that the prices of tins, easy open lids, cartons and shrink wraps have driven up tomato paste prices.

The biggest six-month deflation was registered for onions at 37.3% from 45,000 rials (39 cents) to 29,000 rials (25 cents). Cucumber prices also declined around 28% and the prices of chicken and eggs saw a 7% drop over H1.

Overall, the decline in the prices of food items included in vegetables group could be blamed on seasonal factors and increasing supply. The price increases of items like tea might stem from the discontinuation of import subsidy, however red meat and butter did not become costlier after being taken off the subsidy list.

The runaway rise in the prices of tomato paste and Iranian rice seems unreasonable, as the latter’s prices grew 40% in H1 whereas the average price rise of goods and services was around 10% in the six-month period. In addition, the allocation of subsidized currency to some items, namely sugar and vegetable oil, had no impact on their prices over the past year as their prices increased more than 30%.