Is Iran’s bread subsidy reform a half-baked idea? — Stock Exchange & Bazaar Foundation


A new wave of protests has started in Iran. People take to the streets following a controversial cut in subsidies seen as a rise in the price of bread. These protests were inevitable in a country where there are so many economic and political grievances and where civil society and labor groups, demoralized about their ability to influence policy-making through the ballot box, have turned to mobilizations to make their voices and their anger heard. registered.

The policy that sparked the protests was widely reported as a cut to a “bread subsidy” that suddenly increased the cost of bread and grain products. This is incorrect. The subsidy that was eliminated was an exchange rate subsidy. The government had provided Iranian importers with allocations of hard currency below market prices. This policy indirectly subsidized the purchase of wheat and some other foodstuffs by importers. It did not directly subsidize the purchase of bread by ordinary people.

Importers could apply for foreign exchange allowances from the Central Bank of Iran to import wheat. In theory, this would allow them to bring wheat to the Iranian market at a lower price. But in practice, the subsidy had long ceased to operate. Several distortionary effects of the policy likely generated inflationary pressures across the economy.

First, the exchange rate subsidy was poorly targeted. To put it simply, the Iranian government was intervening to make foreign money cheaper, not the bread prices themselves. The subsidy was therefore not adequate to stabilize prices when Iran’s import requirements increased, which periodically occurs when the domestic harvest falls short of targets. Nor has it been able to counter the effects of global wheat price increases. Bread and grain prices have been rising steadily in Iran for years, quadrupling since 2018.

Second, the supply of foreign exchange at a subsidized rate worsened Iran’s budget deficit. Financing this deficit is a major driver of inflation in Iran. The official subsidized exchange rate deviated from the exchange rate on which the Iranian government’s budget is balanced in 2015. Since then, the gap between the two rates has increased significantly. The subsidized exchange rate has been set at IRR 42,000 since 2019. The exchange rate in the Iranian government’s budget for the year starting March 2022 is IRR 230,000. As this gap widened, the Central Bank of Iran found it increasingly difficult to meet importers’ demand for subsidized foreign exchange, creating a shortage of foreign exchange liquidity that made it more difficult pure and simple stabilization of the Iranian currency. In recent years, the Iranian government has spent around $12 billion in hard currency on a subsidized basis.

Third, this additional exchange rate volatility has increased pass-through effects related to Iran’s dependence on imports more generally. The Central Bank of Iran has partially succeeded in stabilizing the exchange rate by introducing a centralized foreign exchange market for importers and exporters called NIMA. But Iranian economic policymakers were tying their hands in stabilizing this exchange rate, which is far more critical to Iran’s economic performance, by diverting precious foreign exchange resources to importers of essential goods. Regarding inflation in general, the government should focus on intermediate goods on which “made in Iran” products depend. The exchange rate subsidy for essential goods made it more difficult to stabilize the exchange rate for all other goods.

Fourth, the exchange rate subsidy has always been abused. Particularly in the early years, importers were notorious for seeking and receiving subsidized currency allocations and either pocketing those allocations or turning around and reselling the hard currency to other businesses at the market rate. This kind of profit was difficult to control. As allowances came under closer scrutiny, importers with political connections were more likely to continue to receive allowances from the Central Bank of Iran, making enforcement politically difficult.

Evidence that the exchange rate subsidy failed can be seen in the Consumer Price Index data. Bread and cereal inflation has exceeded general inflation since last summer. This probably reflects the fact that, in practice, a decreasing volume of wheat imports was made using the subsidized exchange rate – the reform was already embedded by the newly elected Raisi government. The sudden price increases we are seeing now are more likely the result of price gouging. Companies across the food supply chain are using policy reform as an opportunity to raise prices, knowing the government will be blamed.


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