Iranian government considers subsidy cuts despite rising poverty

As Iranian citizens grapple with rising poverty and rampant inflation, officials are attempting to address the budget deficit by raising prices on bread, fuel, and essential goods, aiming to reduce government subsidies and ease the fiscal shortfall.

Mohammad-Reza Bahonar, a member of the Expediency Discernment Council, has suggested a potential 25-fold increase in gasoline prices, while the deputy minister of Economy has urged that the price of bread needs to be raised.

Over the past three years, the Islamic Republic has sharply increased the prices of certain energy carriers and lifted price controls on flour used for non-traditional breads and pasta. Even the price of traditional bread, which is subsidized by the government, has been raised in two stages, amounting to an approximate 70% increase.

This week, the Court of Audit reported widespread government violations in subsidy allocations, specifically noting 730 trillion rials (approximately 1.2 billion USD), related to bread subsidies. Additionally, the government has forced the Central Bank to withdraw 315 trillion rials ($500 million) from the accounts of certain government agencies and illegally allocate it to partially settle the government’s debt to private wheat farmers.

Despite these extensive violations, the government still owes wheat farmers 1,160 trillion rials ($2 billion dollars) as the harvesting season has been completed and producers desperately need money.

Iran’s wheat market

According to The Food and Agriculture Organization of the United Nations (FAO) statistics, Iran consumes 16.5 million tons of wheat annually. Iranian state statistics also show that 10 million tons of this amount is supplied to traditional bakeries, while the rest is sold at free market prices to other consumer sectors, such as free market bread and pasta production units. Farmers sell an additional 3.5-4 million tons on the free market.

In traditional bakeries, 80% of the final bread price is covered by government subsidies, with the citizens paying 20% of the actual bread price.

Last year, Iran imported 2 million tons of wheat, and FAO forecasts this figure will rise to 3 million tons this year.

Over the years, Iranian wheat farmers have preferred to sell their wheat on the free market due to low government purchase prices and delays in settling their debts. Last year, one-quarter of their wheat production was sold on the free market, especially to poultry farms.

Last year, the government paid 130,000 rials per kilogram of wheat to domestic farmers, while the average global wheat price was around 34 cents, equivalent to 160,000 rials (based on last year's dollar rate). Due to sanctions and increased costs of purchasing and transporting wheat, Iranian government also spent 250,000 rials (50 cents) per kilogram for imported wheat, the Iran Custom statistics indicate.

This year, the government has increased the wheat price purchase from domestic farmers by 34% year-on-year, but Iranian rial also has lost 20% of its value comparing to last year. On the other hand, the costs for electricity, fuel, fertilizers, labor, and services in agriculture sector have also seen significant increases.

Islamic Republic officials have accused the public of wasting bread over the years, suggesting that increasing its price is necessary to reduce consumption.

The point is that although Iran's per capita wheat consumption is 2.5 times the global average, but only 60% of this wheat is supplied to traditional bakeries that use government subsidies.

Bread has always been an important staple in the Iranian diet. For context, Iran, Turkey, and Germany have similar populations, yet Iranians consume 27% less bread than Turks and 2.5 times more than Germans. When it comes to rice, Iranians consume nearly six times more than both Turks and Germans. However, Turks and Germans have a much higher intake of meat and dairy products—Turks consume more than twice as much meat and four times as much dairy as Iranians, while Germans consume twice as much meat and 13 times as much dairy.

Therefore, it's not accurate to say that Iranians waste bread; instead, the focus should be on addressing the low consumption of protein-rich foods among Iranians. This disparity is largely due to the decline in per capita income caused by the country's struggling economy.

Gasoline shortage crisis

Over the past three years, Iran has neither launched new refineries nor started building any. Meanwhile, nearly one million domestically manufactured vehicles, known for their low quality and efficiency, are sold to citizens each year. As a result, gasoline production at Iranian refineries last year was about 97 million liters per day (ml/d), while consumption peaked at 115 ml/d.

To address this deficit, the government blended 14 ml/d of additives, including 8 ml/d of non-standard petrochemical products, into the gasoline supply—a practice harmful to human health. This increased daily gasoline production to 111 million liters, with the remaining demand met through imports.

Statistics from the Oil Ministry for March 2024, the first month of the Iranian fiscal year, reveal that the government has increased the amount of additives in gasoline to 25 million liters per day, significantly endangering the health and safety of Iranian citizens. This measure comes in response to a 6% reduction in gasoline production at refineries and a 9% increase in gasoline consumption compared to the same month last year. The reasons for the decline in refinery production remain unclear, as does whether this trend has continued in subsequent months.

In 2022, before Iran faced gasoline shortages, only 5-6 million liters per day of additives were blended into the gasoline. Now, as the government becomes a gasoline importer for the second consecutive year, calls for price increases are growing louder. Mohammad-Reza Bahonar, a former parliament representative and member of the Expediency Discernment Council, has stated that if the gasoline imbalance continues, prices could rise to 500,000 rials (over 80 cents) per liter. Currently, subsidized gasoline in Iran is sold at 15,000 rials (2.5 cents) per liter, while non-subsidized gasoline is priced at double that amount.