|Pre-Ref|Post-Ref|Change|
|---|---|---|
|Subsidies<br>1,170|731|-439|
|Average transfer per capita, daily (IRR)<br>0|8,380|8,380|
|Transfers, universal<br>0|300|300|
|Net total budget<br>1,170|1,030|-139|
|Source: Authors’ calculation usingforecasted HEIS 2018/2019.|||

It is important to mention that cash transfers may lose their value if not adjusted for inflation in time. This happened after 2012 in the Islamic Republic of Iran, when due to due to high inflation the real value of cash transfers diminished and was the key factor behind the increase in poverty in 2012-2014 (KarakurumOzdemir et al. 2016). Regular indexation of cash transfers to keep their real value unchanged along with introducing targeting mechanisms could help the poor to cope with the social-economic shocks.

# 6. Conclusions

In this paper we studied the impact of the gasoline price reform of 2019 on poverty, inequality and government spending using the most recent household budget survey from the Islamic Republic of Iran conducted in 2018/19 and updated to reflect the prices in 2019/20. We showed that households spend 2.1 percent of their expenditures on gasoline, with the middle deciles consuming the most gasoline directly, relative to their total household budget. The benefits of subsidies are highly regressive, with the richest decile benefiting 10 times the poorest decile.

We separate the effect of the price increase into direct and indirect impacts. We find that the reduction in the monetary well-being of households due to the direct impact is 2.8 percent, but due to the indirect impact it is 3.4 percent on average. The average loss in welfare from indirect impacts is higher than the direct impacts for all deciles. The overall increase in poverty, measured by the 5.5 2011 PPP USD daily poverty line, will be about 2.9 percentage points. Inequality is expected to increase as well.

Although the rich benefit much more than the poor from gasoline subsidies, the poor stand to lose a larger share of their welfare with the price reform due to their low initial incomes and their greater consumption of goods which depend upon gasoline for transportation. Overall, the poorest decile loses almost 7 percent of their welfare while the richest decile loses about 5 percent. The fact that the poor would face higher negative impacts from the price reform justifies the use of cash transfers to keep poverty from increasing.

We estimated that a universal payment of 8,380 IRR would keep poverty at the pre-reform level. This transfer would amount to 300 trillion IRR, which is 68 percent of the program savings of 439 trillion IRR. The GOI-stated aim of the price reform was to use the revenues for cash distribution among households and started paying cash based on household size to the poorest 18 million households. We showed that if targeting is perfect, cash transfers under this scheme would be on average equal to IRR 13,894 per capita daily and would reduce poverty below the pre-reform level despite the impacts of the price increase. It will fully compensate the bottom 50 percent of the population and will require 77 percent of savings to be re-distributed.

Our findings indicate that a welfare reducing price reform can reduce poverty and inequality if it is accompanied by cash transfers. The savings from the program are enough for both compensating the affected population and budgetary relief for the government. The important implicit assumption in our 12