Chapter 8: The Islamic Republic of Iran: Battling Both Income Loss and Inflation 209
At the regional level, some areas were more heavily affected than others. Figure 8A.2 in the annex shows the price indexes for each province separately. For ease of presentation, figure 8.4 (panels c and d) groups provinces into regions and shows the price indexes separately for the urban or rural areas of each region. At the upper end, households in rural Zagros (Bakhtiari, Hamadan, Ilam, Kermanshah, Kohkiloyeh, Kurdestan, and Lorestan) experienced the largest price increases (2.8 times), although those in the urban parts also experienced high inflation (2.7 times).14 At the other end, households in the Tehran metropolitan area saw the lowest price rise in their consumption basket (2.5 times increase). Among urban households, those in the Persian Gulf (2.6 times) and the Southeast (2.6 times) saw relatively high inflation compared with those in other regions. From a poverty perspective, the most worrisome areas are the provinces of South Khorasan in the Northeast and Baluchestan and Sistan in the Southeast regions, which had high initial poverty at the beginning of the pandemic, with households experiencing price increases of over 2.7 times by October 2020 (figure 8A.3 in the annex). How robust are these results? Our inflation analysis estimates the change in cost-of-living increases for households if they were to keep their consumption habits constant. But as a response to high inflation, households may change the composition of their budgets, choosing to consume cheaper goods. Hence, the method overestimates the potential welfare impact because the possibility of consumption substitution is not incorporated. The welfare effect after substitution is approximated in a robust analysis by calculating the price index using the expenditure shares calculated from the end-line survey (2018/19), after households have adjusted their consumption patterns (Paasche index). The expenditure shares in the end-line period are in figure 8A.4 in the annex, but they reveal only minimal differences in expenditure patterns compared with the baseline period.15 Consequently, the price indexes also show magnitudes similar to those in the main results (figure 8A.5 in the annex). This result suggests that the ability to substitute consumption was not large enough to offset the differences in the experienced inflation across households in different parts of the country.
Impacts on Household Welfare and Poverty The impact of the COVID-19 shock depends on the preexisting exposure of households to shocks, which depend on their income sources and where they are across the welfare distribution. Of workers in the poorest 20 percent of the population, 60 percent are employed in the sectors expected to be affected the most during the pandemic, a large proportion of them because they work in the construction sector. The poorer are
