Iran Chamber of Commerce, Industries, Mines and Agriculture recently conducted a survey on the impact of eliminating import subsidies for 115 manufacturing and services enterprises.
These enterprises were active in the fields of dairy, oil, bread, flour, meat and chicken production (over 91% of these businesses procured more than 55% of their raw materials using subsidized foreign currencies).
The survey showed 93% of these businesses are expecting to see the end prices of their products or services to increase by an average 134%. This is while the end price of some essential goods and agricultural products is essential to increase by 70% to 438%.
The prices of goods and services accelerated at an unprecedented pace after the government decided to overhaul the import subsidy system.
The government move saw the abolition of the controversial practice of allocating cheap dollars at the rate of 42,000 rials per dollar, locally known as the Preferential Foreign Currency, to import essential goods, including corn, soymeal, unprocessed oil, oilseeds and barley, in addition to wheat, flour and medicine.
The market value of the dollar is currently above 300,000 rials.
“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 the allocation method has changed,” President Ebrahim Raisi said in a televised speech on the eve of the introduction of the move in May.
In his speech, Raisi emphasized that the removal of cheap dollar allocation will not lead to a price rise in wheat, flour and medicine. However, the move has led to a dramatic leap in the prices of essential goods. In fact, the prices of all commodities and services have also risen suddenly in a ripple effect.
Also known as necessity or basic goods, essential goods are products consumers will buy, regardless of changes in income levels.
The ICCIMA survey shows 89% of respondents expect the implementation of this policy would lead to a 207% increase in their working capital outlay. Results also show that the working capital needed for the production or supply of some strategic goods and essential livestock and agricultural products will increase substantially.
For example, it is expected that the working capital needed by producers of cooking oil will increase by 482%, livestock (meat and chicken production) by 265%, dairy products by 219%, agricultural pesticides by 209%, bread and flour by 188%, animal feed by 80% and agricultural and greenhouse products by 38%. As a result, challenges regarding the provision of working capital will become more complicated for the producers of these items compared with other products.
Moreover, 77% of the respondents are expecting to see their sales decline by 48% following the implementation of the policy. Producers of essential goods and agricultural raw materials, including those needed by producers of meat and chicken, agricultural pesticides, dairy products, cooking oil and bread and flour expect to see their sales fall significantly.
Sixteen percent of the respondents expect to see their access to raw materials become more challenging as a result of the removal of subsidies and 38% expect their raw material access to improve, while 39% predict no change.
Finally, respondents were asked about the consequences of implementing this policy and the government’s support measures. Results show 83% of respondents want the government to lift bans and restrictions on exports; and 29% of economic players in the services sector want the government to refrain from intervening in pricing, following the implementation of the policy.
Following the introduction of the subsidy removal policy, branded as “economic surgery” by the government, inflation hit record high.
Inflation Hits Record High
According to the Statistical Center of Iran, food prices increased by 25.9% in the third month of the current Iranian year (May 22-June 21) compared to the previous month.
The general goods and services Consumer Price Index (using the Iranian year to March 2017 as the base year) stood at 482.1 in the month to June 21, indicating a 12.2% rise compared to the previous month — the highest monthly price rise on record in SCI’s database (since 2018).
The average CPI in the 12 months to June 21 increased by 39.4% compared with the corresponding period of the year before.
Consumer price inflation for the month under review jumped by 52.5% over the same month of the previous fiscal year.
SCI put average inflation for urban and rural areas at 38.9% and 41.8%, respectively. CPI registered a YOY increase of 51.4% for urban areas and 58.2% for rural areas in the month.
CPI reached 473.2 for urban households and 531.9 for rural households, indicating a month-on-month increase of 11.5% and 15.8%, respectively.
SCI’s latest data show the general goods and services Consumer Price Index (using the Iranian year to March 2017 as the base year) stood at 504.3 in the fourth month of the current Iranian year (June 22-July 22) to register a record high of 54% compared to the similar period of last year.
The highest year-on-year inflation was registered for the “food and beverage” group with 87% while “communications” saw the lowest YOY rate with 10.8%.
The month-on-month and annualized inflation stood at 4.6% and 40.5% respectively.
Notably, with a coefficient of 26.64%, CPI for food and beverages stood at 780.2 in the month to July 22, indicating a 5.7% increase from the previous month. The index registered a YOY increase of 87% and the CPI of the group increased by 55.1% in the 12-month period to July 22 YOY.
