Economist: Gas Price Hike Impact Not Inflationary

EghtesadOnline: Senior economic analyst Saeed Laylaz says there is no scientific evidence that the rise in gasoline prices would definitely have an inflationary impact.

News ID: ۷۸۵۰۶۲

24 November 2019

“Despite gas price stability over the past five years, inflation has continued to accelerate. During Mahmoud Ahmadinejad's [former Iranian president] last five years in office, consumer prices increased as well, though energy prices remained unchanged. What actually causes inflation in Iran, like any other country, is the imbalance between supply and demand,” Jamaran.ir quoted Laylaz as saying.

On Nov. 15, the National Iranian Oil Products Distribution Company announced that gasoline has been rationed and prices raised by at least 50%, according to Financial Tribune.

“Private car owners can buy 60 liters of subsidized gasoline every month with a fuel card for 15,000 rials [12 cents] per liter, up 50% [in prices]. Additional purchases [maximum 250 liters a month] will cost 30,000 rials [25 cents] per liter, up 200%,” NIOPDC said.

Noting that not only did he approve of the measure, but he was also among those proposing it, Laylaz said he believed "this appropriate step was taken too late; it should have been implemented 20 months ago".

Laylaz is probably referring to the time US President Donald Trump withdrew from the 2015 Iran nuclear deal and unilaterally restored sanctions on the country, in defiance of the deal’s five cosponsors—Britain, China, France, Germany and Russia.

“We did have the worst energy policy ever; a policy that reinforced inequality by giving extra energy subsidies to the rich, those who owned a car. So much so that gas consumption in Tehran, which comprises 10% of the country’s total population, accounts for more than one-third of overall consumption in Iran. In other words, those living in Tehran use gas three times more than other Iranians. The richest 10% of the population consume 23 times more than the poorest 10%, he maintained.

“And, make no mistake, granting subsidies to fossil fuel is a way of splitting evenly cancer, traffic and pollution among members of the public,” he said, adding that he also defended a similar round of gasoline price increase under Ahmadinejad in 2010, the year the Targeted Subsidies Law authorized the reduction of food and energy subsidies, and instead allowed the payment of 455,000 rials [$3.82 at current exchange rates] to each and every Iranian on a monthly basis. Laylaz is known to be one of former president’s severest critics.

According to Oil Minister Bijan Namdar Zanganeh, the latest rationing and doubling of gasoline that started on Friday will increase annual government revenues by $2.5 billion, which will be used exclusively for welfare spending.

Improvement in Gini Coefficient Expected

Laylaz told Fars News Agency that he is a staunch advocate of fuel rationing, raising gas prices and handing out the earnings to people of modest means.

“The experience of 2010 experimentally confirmed that following the introduction of the Targeted Subsidies Law, the Gini coefficient improved suddenly and significantly, and I reassure you that the same thing would happen this year. The government took a step away from misuse and squandering of energy resources and moved toward social justice and good governance,” he said.

The Gini coefficient is the best-known way of measuring inequality by aggregating the gaps between people’s incomes into a single measure. If everyone in a group has the same income, the Gini coefficient is 0; if all income goes to one person, it is 1.

Iran has registered Ginis of around 0.4 in recent years, despite improvements to 0.35 it made in late 2000s.

Figures by the Statistical Center of Iran show the spending gap between the richest and the poorest widened further during the last Iranian year (March 2018-19). Households in the top 10th of the income distribution spent 14.45 times as much as those in the bottom 10th. In other words, 10 million high-income individuals in the country spent 14.45 times more than 10 million low-income Iranian people.

Also, households in the top 20th and top 40th of the income distribution spent 8.36 and 4.41 times as much as those in the bottom 20th and 40th, respectively.

What is of significance here is that such spending gaps have increased compared with the year before (March 2017-18). They are, in fact, the biggest spending inequalities registered since the Iranian year ending March 2012.

Between the years ending March 2002 and 2008, the spending gap between the top 10% of income distribution and the bottom 10% grew from 16.43 to 17.59, the highest level posted during 18 year. A downward trend started in the fiscal 2008-09 to 2013-14 (from 15.79 to 10.68) thanks to the implementation of welfare measures such as the Targeted Subsidies Law.

The spending gap between the richest and the poorest resumed its upward movement since the year ending March 2015 to last year (March 2018-19) from 12.33 to 14.45. What’s interesting is that the taming of inflation during 2015-18 did not buck this trend.

Price Worth Paying

Laylaz believes that energy reform is a price worth paying.

“It must go through in spite of oppositions and apply to other energy carriers, including natural gas and diesel. People will come to know the plus sides of this policy as soon as they receive the first batch of cash subsidies earned from price reforms. In fact, the government was legally allowed to increase fuel prices to no less than the Persian Gulf FOB by the end of Fourth Five-Year Development Plan [2006-11],” Fars News Agency quoted him as saying.

Prior to the price hike (when gasoline was sold at 7 cents), the government’s annual earnings from selling gasoline amounted to $31.7 billion. Now this will reach $34.2 billion or 8% higher.

“Daily consumption now is around 95 million liters and is projected to rise to 100 million liters in the next fiscal year, of which 67% or 24.5 billion liters will be sold at 15,000 rials (cents) per liter and the rest (12 billion liters) at 30,000 rials (cents) per liter,” the oil minister said.

“The government will earn $1 billion more by selling subsidized fuel and close to $1.5 billion from selling non-subsidized gasoline,” he said, adding that the excess supply will be offered on the energy bourse.