Determining the Optimum Scenario to Reduce the Effects of Preferred Currency Removing Shocks on Major Food Groups; Recursive Dynamic Computable General Equilibrium (RDCGE) Approach

Purpose: The currency jump in early 2018 and the increase in prices during the following years caused the Iranian government to adopt a policy of preferential currency allocation (42000 Rials per US$) for the import of basic goods from August 2018. The main goal of this policy was to control the fluctuations of the domestic market and the decrease in the welfare of the society. However, the available evidence showed that, after a few years of the implementing this policy, due to the increase in the price of most targeted basic goods and the lack of profit of the lower-income deciles in an optimal way and the emergence of problems such as spread of rent and corruption and the diversion of allocated resources in the form of official re-export of inputs or final goods or smuggling, hoarding, overselling to the final consumer, etc., the policy of assigning preferential currency to essential goods was declared to be unsuccessful. Following the ineffectiveness of this policy, the Iranian government implemented the policy of removing preferential currency from basic goods in May 2022. The evidence shows that, although this policy has increased the price of major food groups (chicken meat, eggs, milk, red meat and edible oil), it has led to a continuous decrease in inflation of major food groups. However, the basic question is that ‘if the policy was implemented gradually, wouldn't it have better results?’ Also, ‘what type of support compensation for households (cash or goods) and what level of support coverage for income deciles would lead to better results?’ Therefore, the present study was conducted with the aim of determining the optimal scenario to reduce the effects of the shock of removing the preferential currency on the major food groups.
Methodology: In order to determine the optimal scenario of reducing the effects of the shock of removing the preferred currency on major food groups (chicken meat, eggs, milk, red meat and edible oil) 18 scenarios designed in the form of the type of removal of preferred currency from basic goods (at once, during 3-years and during 5-years period), the type of support compensation (cash or goods) and the level of coverage of income deciles (all income deciles, low and middle income deciles and only low income deciles) were discussed. For this purpose, the required data were collected from the social accounting matrix of the Islamic Parliament Research Center, Central Bank's input-output table, and Iran's Statistics Center. In addition, in order to analyze the data, the recursive dynamic calculable general equilibrium (RDCGE) model (which is based on the assumption of adaptive expectations) and Matlab software were used.
Discussion and Results: According to the results, the best scenario for reduct the negative effects of preferred currency removing shocks on major food groups is the scenario of removing the preferred currency from basic goods during a 5-years period, providing support in cash and providing support to the low and middle deciles of income, which has a positive effect on production, consumption, income of the factors of production (labor and capital), welfare of consumers, welfare of producers, and total welfare. In the sense that if the government gradually removes the preferential currency for basic goods over a 5 years period and supports the low- and middle-income deciles in cash, the negative effects caused by the shock of implementing preferred currency from basic goods in the society is neutralized and then becomes positive.
Conclusions and policy implications: Based on the results of the research, the best scenario is the elimination of the preferential currency during a 5-years period, cash compensation and the level of covering the low and middle-income deciles), it is suggested for the government officials to make the policy of removing the preferential currency from basic goods as close as possible to the proposed scenario and to support the consumers of basic goods in cash. This is because, in the method of compensation in the form of goods, some of the resources planned for the project can be ensured to be spent on buying basic goods and provide the minimum calories needed by the household, but the method leads to increased demand for basic goods, disruption of relative prices, and creation of a black market for commodity coupons. On the other hand, if the electronic coupons can only be cashed in certain distribution centers, it will create a kind of rent for selected distribution centers compared to micro distribution centers. In the cash method, however, the right of choice of the households is recognized from the beginning; since households can receive the subsidy payment in cash or purchase basic goods, it leads to the freedom of choice for them. As a result, the purchasing power of consumers' increases, which will subsequently lead to an increase in the production of goods including food. In addition, some believe that the cash support compensation will lead to an increase in inflation. If its resources are precisely determined and secured and the Central Bank's resources are not used for this purpose, it will not cause inflation. Also, the cash support compensation should not be such that in creates the impression of being permanent or long-term. Rather, it should be stated from the beginning that this subsidy is only to pass the transition and it temporarily supports the households.