# 1. Introduction

Like many other countries in the MENA region, the Islamic Republic of Iran subsidizes energy very extensively. Pricing fuels below costs tends to increase inefficiency, overconsumption and environmental problems (Fattouh and El-Katiri 2013, and Davis 2014). Energy subsidies, especially on gasoline, are mostly regressive and benefit the rich more than the poor in the context of the Middle East and North Africa region in general and the Islamic Republic of Iran in particular (Mostafavi-Dehzooei and Salehi-Isfahani 2017, Verme and Araar 2017). Reducing energy subsidies, on the other hand, is challenging due to the general public opposition to price and fiscal reforms. In an oil exporting country like the Islamic Republic of Iran, energy subsidy is for the most part implicit and has little direct fiscal burden. However, it results in inefficient use and a regressive distribution of national wealth.

The Islamic Republic of Iran’s economy continued to face recession after 2016/17, along with new international sanctions imposed on the country’s petrochemicals, metals, mining, and maritime sectors. GDP is expected to further decline. The fiscal deficit is estimated to further widen, calling for urgent fiscal adjustment measures (World Bank 2019).

Reducing energy subsidies is one of the ways to address the strained fiscal situation. The Government of the Islamic Republic of Iran (GOI) increased the price of energy on several occasions over the past two decades. Price reforms and rationing of gasoline have always been the subject of many discussions and opposition during this time. A major price reform was the Targeted Subsidy reform of 2010, where prices of energy carriers and bread increased by multiples ranging from 2 to 9 (Salehi-Isfahani 2014). The goal of the reform was to keep prices of energy carriers close to Persian Gulf FOB, and cash transfers were paid to virtually everyone to reduce opposition. Nine years after this major overhaul, the price of energy is still very low compared to international levels mainly due to the instability of the rial. The gasoline price, for example, was 10,000 IRR (around US$0.10) per liter before the new gasoline price reform of 2019.

On November 15, 2019, the National Iranian Oil Products Distribution Company (NIOPDC) implemented a 50 percent increase in the of price of petrol at re-introduced rationed amounts (e.g. 60 liters/month for private cars) and a 200 percent increase for consumption beyond the ration amount. The official announcement came only one day before the start of the price reform, in which it was specified that revenues generated from the price increase were supposed to be exclusively redistributed back to 18 million means tested households. This drastic change was introduced and went into effect overnight and led to street protests which quickly became violent. To the best of our knowledge, until now there has been no comprehensive empirical evidence on the welfare and fiscal implications of the 2019 reform in the Islamic Republic of Iran.

This paper uses the most recently available household expenditure and income survey (HEIS) from 2018/2019 to estimate direct and indirect impacts of the proposed price increase on poverty, inequality and government revenues. The direct impact measures the impact of a price change on household wellbeing via the consumption of the subsidized products. Indirect effects measure the impact via the consumption of products that are affected indirectly by the change in price of subsidized products. For example, the prices of goods and services which use gasoline in their production or delivery will also be affected by the increase in gasoline prices. In addition, we compare poverty and fiscal implications from the proposed government cash transfer scheme with a scenario of universal or perfectly targeted cash transfers needed to bring poverty back to the pre-reform level. All estimations are based on a particular 2