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The Iranian Bread Crisis
What Happened To The Government Subsidies?
By
Sharon B
/
June 2022

On May 5, 2022, riots erupted once again in Iran. Iranians took to the streets to protest a controversial subsidy cut that has led to a sharp increase in the price of bread. The subsidy cut combined with inflation has led to prices of basic foodstuffs skyrocketing. The prices for staples like milk, eggs, cooking oils, and chicken have been raised by as much as 300%. The price of 1kg of flour has risen by 500% in one week. The cuts in subsidies have caused a 169% surge in the price of pasta. Following this, the protests were inevitable as the masses faced a dire situation. Additionally, workers' struggles in the past few months have catalyzed the population into action.

The protests began in the cities of Khuzestan province mainly Shadegan, Izeh, Dezful, Hamidiyeh, and Andimeshk. The protests are made of local uprisings mobilized by workers whose pleas over the years fell on deaf ears. They spread across the country to over 100 cities, now reaching Lorestan and Chaharmahal-Bakhtiari provinces.

The Government Subsidy (Bread Subsidy)

Although it is reported as such by the public, the “bread subsidy” is actually an exchange rate subsidy. The Iranian government had in place a policy that allocated hard currency to Iranian importers at below the market rate. In turn, this policy subsidizes the purchase of wheat and other select foodstuffs indirectly. However, it didn’t directly subsidize bread purchases by ordinary Iranians. In order to import wheat, importers could apply for allocations from the Central Bank of Iran. Ideally, importers would then bring wheat to the country at a lower price. However, the subsidy stopped working a long time ago. There are four factors that led to the ultimate failure of the subsidies;

  • Poor targeting
    The subsidy targeted the foreign markets instead of actual bread prices. The subsidy failed to stabilize prices when Iran’s import needs rose after the domestic production failed to meet the targets. It could not counteract the effects of increased global wheat prices.

  • Increased fiscal deficit
    The subsidized foreign exchange rate exacerbated the fiscal deficit. One of the drivers of inflation was financing this deficit. The subsidized exchange rate is fixed at IRR 42,000 while the exchange rate the Iranian government balances its budget on is IRR 230,000 from March 2022. This widening spread between the two exchange rates has made it difficult for the Central Bank of Iran to meet demand from importers for subsidized foreign exchange. It led to the government spending $12 billion in hard currency on a subsidized basis.

  • Inflation and overreliance on imports
    The efforts to stabilize the exchange rate despite the additional volatility led to an increase in Iran’s dependence on imports. The Central Bank of Iran created a centralized foreign exchange market called NIMA that was aimed at stabilizing the exchange rate. The economic policy markers on the other hand also sought to stabilize it by diverting foreign exchange rate resources to essential goods importers. This subsidy for essential goods made it harder to stabilize the exchange rate for other goods which didn’t help with inflation.

  • Abuse of Subsidy
    The subsidy has been fraught with corruption and profiteering. In its early ages, importers would receive allocations and pocket them or sell the hard currency to other firms at market rates. Despite increased scrutiny to prevent this, importers would still use their political connections to continue receiving allocations from the central government. This led to the subsidy only serving the elite and politicians, leaving ordinary Iranians out of the loop.

Soaring global wheat prices

The war in Ukraine exacerbated the rise in food prices in Iran. Russia’s invasion of Ukraine led to the disruption of the global food supply. Both Russia and Ukraine account for a large percentage of the global wheat and sunflower oil exports.

Although the subsidy cuts were inevitable with the soaring wheat prices globally, the regime has nothing in place to shield its citizens. Raisi came into power with the promise of economic reform to fix the mistakes of Rouhani’s government. However, it has failed to deliver and left Iranians once again in a desperate economic situation.

The Rise of Civilian Protests

In recent years, Iran has seen a rise in civilian protests. Following the nationwide November 2019 protests, in which hundreds were brutally killed in a state crackdown, the government has been using similar measures to suppress uprisings.

Nonetheless, Iranians have continued their protests. The regime is facing a population that is growing more frustrated and impatient due to the skyrocketing cost of living.

The government responded to the May 5 protests over rising flour prices in a similar manner it had in the past. They raided several civilian homes and cut the internet to reduce the spread. It has been reported that one person has been killed.

Workers' uprisings have also been on the rise in Iran. Last year alone, the regime faced a national teachers’ movement, a national oil-gas worker’s strike, and a localised farmer’s uprising in Khuzestan and Isfahan. The unaddressed concerns of the workers are also acting as a catalyst for the outbreak of riots in the country.

Softening the blow: Electronic coupons

Following the announcement to cut the subsidies, the Raisi administration promised it would provide targeted cash transfers. The cash transfers will be in the form of electronic coupons to be provided to the most vulnerable members of the society. The coupons will allow citizens access to a limited amount of bread at subsidised rates. The rest of the bread will be available at market prices. Many citizens have reported that they have not received the cash transfers while those who have can’t redeem them.

Iran has a good history with cash handouts and it has worked before to shield citizens after the removal of energy subsidies. If the government can execute these transfers properly it would help in protecting the most vulnerable Iranians. It needs to communicate clearly its implementation plan and shield against corruption. Otherwise, what is awaiting the regime is a revolution as the citizens are driven into a corner without any reprieve.

The “Bread Crisis” touches on the lives of all Iranians. Unless Raisi’s administration takes appropriate measures to ensure the citizens can afford food, there will be no end to the riots. From the recent protests, it is clear that Iranians are no longer afraid of the brutal suppression measure taken by the regime. The lack of trust in the regime is worsened by the authorities killing protestors. Instead of making the populace fearful, it is becoming a rallying point.

ikiIran
Leaks from the Islamic Republic of Iran’s Government Agencies