pressure on prices of other goods and services to rise as a result of the increase in gasoline prices. The indirect impacts aim to capture these effects and the model used is called “costs-push”.<sup>4</sup> We estimate the impact of the gasoline price reform on producer prices by combining the Input-Output (I/O)<sup>5</sup> table of the Islamic Republic of Iran for 2011/12 with a price-shifting model of price formation in the productive sectors. Since all petroleum products are aggregated together in the Iranian I/O table, we estimate the price hike in petroleum products to be 57.9 percent (details of the estimation are provided in Annex 1). Using the I/O table and a price-shifting model, we estimate the increase in prices of productive sectors due to the reform. We then use the same forecasted HEIS 2018/19 micro-data for expenditure records of households and map all household consumption expenditure to economic sectors for which we have estimated producer price changes. The estimate of the indirect impact is empirically driven in precisely the same way as the direct impact estimate: it uses household-level consumption expenditure records to compile a household-specific indirect impact.

The negative impact on consumption from increased prices of goods and services other than the gasoline sector is shown in Table 6. The average loss in welfare from indirect impacts is about 3.4 percent and it is higher than the direct impact for all deciles. Thus, due to the higher cost of other goods and services, the poorest 10 percent will lose more than twice as much as they lose due to their direct consumption of more expensive gasoline. For the richest, direct and indirect impacts are closer in the magnitude of impact on the overall consumption per capita.

In contrast to the direct impact, the indirect impact hits the poor the most. For instance, population from the poorest decile lose about 5.2 percent of their expenditures through indirect impacts while the richest lose only 2.7 percent. This happens because of several sectors where prices are expected to rise because of higher gasoline prices such as agricultural products and chicken account for much higher shares in the total household budget of the poor. For example, consumption of agricultural products accounts for about 21.0 percent of total expenditures among the bottom 10 percent of population compared to 6.5 percent among the richest decile.

Table 6. The indirect and direct impact on well-being from increase in gasoline prices, <u>%</u>

||direct impact|indirect|ratio,indirect over direct|
|---|---|---|---|
|poorest|-2.0%|-5.2%|2.7|
|2|-2.2%|-4.6%|2.1|
|3|-2.6%|-4.3%|1.6|
|4|-2.6%|-4.2%|1.6|
|5|-3.0%|-3.9%|1.3|
|6|-3.0%|-3.7%|1.2|
|7|-3.1%|-3.6%|1.1|
|8|-3.2%|-3.4%|1.1|
|9|-3.1%|-3.1%|1.0|
|richest|-2.4%|-2.7%|1.1|
|Total|-2.8%|-3.4%|1.2|

Source: Authors’ calculation using forecasted HEIS 2018/2019.

Table 7 shows pre-reform and post-reform estimates for poverty and inequality. The combined impact is modeled sequentially. First, we estimate the direct impact, construct new welfare aggregates and then

> 4 Detailed explanation of the model can be found in Araar and Verme (2015).

> 5 The Input-Output table is prepared by the Statistical Center of Iran (SCI) and is available at: <u>https://www.amar.org.ir/</u>

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