Inflation and the Erosion of the Poverty Reduction Impact of Iran's Universal Cash Transfer

In December 2010, Iran replaced its energy and bread subsidies with an unconditional and universal cash transfer (UCT). In the short-run, this shift away from generalized subsidies had a significant effect on poverty. Studies show that the direct effect of the reform was a reduction in the headcount ratio from 22.5% to 10.6%. However, since the introduction of the reform, inflation has severely eroded the real value of the transfer because adjustments to its nominal value have been minimal in comparison. We estimate that after five years, during which time there was a cumulative 136.5% increase in prices (since 2011/2012 or 1390 in the Iranian calendar), the real value of the transfer was cut nearly in half. As a result of this cut, the poverty reducing effect of the transfer declined by about 40%, which translates into roughly a 5 percentage point increase in the headcount ratio. We find that this deleterious consequence of inflation is much higher in rural areas where the contribution of the transfer to the reduction in the incidence of poverty declines from 21.9 to 11.0 percentage points over the course of these five years. The only way for the UCT to recover the poverty reducing results observed at the beginning, without increasing the budget, is by making it a more targeted program focused on the poorest 40% of the population.