The Research Center of Iran Chamber of Commerce, Industries, Mines and Agriculture has assessed the fiscal 2022-23 Budget Law and its impact on the business environment in a report.
Its assessment shows the elimination of import subsidies, a rise in foreign currency rate based on which customs duties are calculated, wage increase and energy price hike for the manufacturing sector will make the macroeconomic environment of businesses inflationary, the Persian daily Etemad reported.
The government’s budgetary decisions will burden the economy’s production sector and fuel the flames of inflation and recession, it said.
During the budget drafting process, Iran Chamber of Commerce pointed out that some of the decisions were inflationary, but members of the parliament ignored its warnings and approved the bill.
The lawmakers left the decision to eliminate or maintain import subsidies in the fiscal 2022-23 budget to the discretion of the government. As much as Iran Chamber of Commerce agrees with the removal of the subsidies, it believes subsidy reforms need to be introduced gradually because of social considerations; an overnight removal of forex subsidies will increase producers’ demand for capital.
Import Subsidy Overhaul
The government of President Ebrahim Raisi announced last week that it started depositing cash subsidies for the first to ninth income deciles to make up for abolition of the subsidy policy that has seen billions of dollars spent on imports of essential goods with the aim of lowering their prices in the domestic market.
A total of 23 million Iranian households, constituting 72 million Iranians, were entitled to the new payments, IRNA reported, citing the Subsidy Targeting Organization.
The Central Bank of Iran announced on Monday that more than 400 trillion rials ($1.3 billion) were deposited to the account of those entitled to the subsidies.
“Until now, we have been paying to producers [read importers] but now the subsidies go to consumers. In fact, the preferential foreign currency has not been ceased, rather its allocation method has changed,” the president said in a late night televised speech.
The ICCIM report stresses that the government’s budgetary decisions in the fiscal 2022-23, along with a 57% increase in minimum wages, will make the macroeconomic environment prone to inflation. The implementation of these policies will impose costs on businesses; it is highly likely that businesses will increase the prices of their goods and services, and the inflationary conditions of the economy will worsen.
Households, obviously, won’t be immune to the consequences of these decisions; the inflationary conditions of the economy will increase their living costs and social dissatisfaction. The 57% nominal rise in minimum wage has a positive effect on Producer Price Index and is bound to affect the supply side of the economy.
A Double-Edged Sword
The ICCIM report says setting the minimum wage is a controversial, socioeconomic issue; it acts like a double-edged sword.
On the one hand, high minimum wage can reduce demand for labor force by enterprises and consequently increase unemployment. Unemployment, especially youth unemployment, is one of the economic woes of Iran. Unconventional increases may encourage employers to not renew employment contracts or sign non-transparent contracts, according to which workers will be forced to accept new conditions to keep their jobs, it says.
On the other, if the predetermined minimum wage does not cover the living expenses of workers, it might lead to a decline in labor supply or workers’ frustration and reduce their productivity. Therefore, in determining the minimum wage, it is necessary to reach a three-way agreement that serves the interest of all parties and has fewer adverse effects on the economy.
Policymakers also need to take into account the impact of the minimum wage on businesses, depending on their field of activity and scale. Those who argue in favor of the unconventional increase in wages say the share of labor cost in the total expenses of economic enterprises is less than 10%, therefore its inflationary effect is insignificant. This argument is acceptable only for industrial enterprises with few workers.
According to the data published by the Statistical Center of Iran on industrial enterprises with 10 and more employees, the share of wage in the total cost of production in fields, such as “production of other transportation equipment”, “repair and installation of machinery and equipment”, “clothing”, “production of non-metallic minerals”, “production of furniture”, “production of tobacco products”, “printing”, “production of leather”, “textiles” and “production of pharmaceuticals and chemical and herbal medicines” is more than 10% (ranging from 39.31% to 49.11%), indicating that the share of labor cost in the expenditure of these industries is significant.
The employers’ expenses regarding the payment of workers’ social security insurance premiums will increase once the minimum wage increases by 57% because the Social Security Organization’s annual premium calculation software automatically adds 23% to the employer’s share based on the approved wage increase.
The probe into the industrial structure of the country also shows small- and medium-sized enterprises account for 50% of the employment. Over the past decade, these firms have been hit hard by declining demand, foreign exchange rate fluctuations and sanctions on financial and commercial exchanges, as well as supply chain holdups following the outbreak of Covid-19. These firms are highly vulnerable to financial and environmental shocks, including wage increases. They might consider layoffs following the implementation of a 57% increase in minimum wages.
