Iraq Institute for Economic Reform 1 Monetization of Food Basket 21st November, 2004

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Iraq Institute for Economic Reform

Monetization of Food Basket

21st November, 2004

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Contents

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In September 1990 Iraq established a food rationing system in response to the introduction of sanctions. The size of the monthly ration – or food basket – increased in 1997, when the UN Oil-for-Food programme came on stream.

All Iraqi citizens are eligible to receive ration cards so long as they have lived in the same place for at least six months, curbing population mobility.

Each Iraqi is entitled to a monthly ration consisting of flour, rice, sugar, powdered milk, tea, salt, soap and a few other items; infants receive formula, cereal and detergent,

Current System

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Current System

The ration system is controlled by two key offices in the Ministry of Trade - the Computer Center and the Office of Planning and Follow-Up.

The Computer Center manages the ration card computer database and

provides computer systems and services to the Ministry and its companies.

The Office of Planning and Follow-Up is responsible for implementation of, and transactions related to, the ration card distribution system.

Three state companies are closely linked to the ration system:

The Grain Board of Iraq imports, stores, and purifies grain purchased through the program;

The General Company for Grain Processing produces and distributes wheat flour and bread;

The State Company for Food Stuff and Trading is involved in warehousing, insurance, and transportation of sugar, infant formula, beans, and detergent … etc.

[1] An exchange rate of 1,500IQD= 1USD is assumed

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Ration cards are good for one calendar year and are renewed annually; the current cards are valid until December 2004.

Each year, the Ministry of Trade sets up 50,000 stands across the

country to expedite ration card renewal,

Ration cardholders pick up their rations once a month, on the same predetermined day each month.

Under the public distribution system, each Iraqi is entitled to a monthly food basket, for a nominal fee of 250 Iraqi dinar ($0.17[1]) in Central and Southern Iraq and similar amount in the North.

Current System

[1] An exchange rate of 1,500IQD= 1USD is assumed

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The standard food basket includes a range of staple items, including wheat, rice, sugar and powdered milk. For infants the food basket is limited to infant formula, weaning cereal, soap and detergent,

The food basket is distributed, and fees collected, through around 50,000 food and flour agents throughout Iraq. Food agents are typically local grocery shops.

Fourteen to sixteen million people – or two thirds of the population –are actually dependent on these rations for survival.

Current System

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• The current Iraqi market value of the standard and infant food baskets – relative to the price of food basket items on local Iraqi markets is around 7,500 Iraqi dinar ($5).

• Actually the food basket is worth around 20,000 Iraqi dinar or $13 per person per month, or an annual cost of around $4.3 billion.

Market Value of Food basket

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The negative impacts of Food Basket on the Economy

Business opportunately is reduced for small businesses. It is not rewarding to investment in food processing,

Orders primarily go to foreign suppliers because they can supply in bulk; bulk buying discriminates against smaller operations of Iraqi farmers, food processors,

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The negative impacts of Food Basket on the Economy

The current arrangement have resulted in declines in farm incomes and agricultural productivity:

Oilseed production discouraged because cooking oil rations have been imported

PDS limits dietary choice, potential expenditures on fruits and vegetables

Iraqi farmers concentrate on cereal crops because of government price

Poor households have to sell food for cash, receiving very little money in exchange

Sale of foods by poor households hurts local markets for farmers

Foodstuffs are low quality

Consumers lack choice

System is wasteful, expensive, subject to corruption, fraud and smuggling

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Recommendations

Current system should be replaced by monthly cash payment sufficient to:

a) buy items currently provided through ration system and

b) encourage individuals to take risk of replacing the old system.

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Advantages of Monetary Payment

Cash payments will provide a major boost to the Iraqi economy ($5 bil. per year)

Most of the money will stay in Iraq, stimulating the economy,

Iraqis will buy from local farmers,

Iraqi factories will be able to manufacture food products for the domestic market,

Iraqi businesses and truckers will distribute and transport food, Distribution and flows of cash will contribute to developing financial sector.

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Advantages of Monetary Payment

Poor households will have money to buy other necessities such as clothes, shoes, private health care,

Households, will have better choice of food and their social life could improve

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How Much Compensation Should Be Provided?

A monthly payment per person of $15 per person ($405 million per month or $4.9 billion per annum, based on a population of 27 million).

The amount between $10 and $13 per person would represent the amountneeded to purchase the food basket items post monetisation, leaving between $5 and $2 per person as compensation for change.

Note: Ministry of trade, should ensure stability of prices, by keeping enough food stock. It is necessary to stand by to any threat to competition.

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The Problems of a Cash Payment Mechanism

Although cash payments would be preferred, the retail bank system is in its infancy, the number of household accounts is small and the ability of the commercial banks to handle large numbers of accounts and account transactions is very limited. It is doubtful that a physical cash distribution approach would be easy to implement. The following are few of the reasons:

The vast majority of Iraqis don’t have a Bank account, Many population centers do not have bank branches, The banking system is still entirely reliant on the physical movement of cash, Huge amounts of cash will have to be moved around the country with associated

logistical and transportation constrains and high handling costs, Security issues are a threat (payment sites have to be highly secured), The Banking system network (300 sites) throughout the country would have to serve ab.

3.8 mil. households. The post office network (300 site) is not equipped and trained for the purpose

Because of physical, technological, management, and employee constraints, attempting to make cash distributions through the existing banking system and post offices is almost certain to result in long waiting lines in many locations, with the accompanying security problems.

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A Better Choice: Electronic Payment Mechanism

In order for the monetization process to be successful it will be necessary to introduce robust solutions complemented with a sturdy communication system that banks and post office locations eventually have adequate facilities and capacity to handle the above mentioned cash payments.

The elimination of cash transactions and the expansion of access points beyond bank branches and post offices to supermarkets, stores and former food distribution agents will bring efficiency to the monetization program.

The technology to achieve this objective already exists in various types of SMART CARDS and their accompanying data gathering and accounting software which can be used through either land lines, mobile lines or via satellite.

Distributing cash through Smart Cards provides a safer distribution channel that is also less susceptible to fraud.

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A Better Choice:Electronic Payment Mechanism

Money allowance is loaded on the individual’s card and then it can be used (debited) to purchase food or other goods and services. Only after is withdrawn or payment transaction is made amount spend/withdrawn is cleared with central account. Minor children’s monthly payments will be credited to the account of a parent or guardian. Smart cards are permanent, can be refilled often and can be used for other purposes such as identification, medical records, etc. They last two to five years before requiring replacement.

Electronic benefit cards (“Smart Cards”) successfully used worldwide (e.g. South Africa, Russia, Saudi Arabia, Brazil, Emirates)

Cards provide Security: Unlike cash, stolen cards cannot be used Fraud reduced because easier to monitor Payments cheaper because electronic Smart Card Systems function without fixed telecommunications link

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Ministry of Trade & Privet Sector

An important element in the short run of the development of efficient goods markets in Iraq will be ensuring reasonable private sector access to government owned distribution networks. This encompasses warehouses, trucks, grain silos and the other apparatus that support the public distribution system. To this extent:

Stores will have to be able to purchase rice, lentils and other goods from Ministry of Trade warehouses

Warehouses will have to be equipped to purchase and sell commodities

Put in place accounting systems Hire employees to handle billing, purchasing

State Company for Foodstuff Trading and the Grain Board of Iraq will also have to be able to buy and sell food

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Program Administration

Administration of the new system should be to tax commission (or to any other body).

Building on the current national organization and structure of the Tax Commission would permit: Re-registration of current beneficiaries and expansion of

registration to cover proposed new beneficiaries Conducting enforcement and monitoring activities and in a more

efficient way Better control of the cash distribution system Building the base for a coordinated and integrated tax/benefit

system over the coming years Minimize the duplication of government administration

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Potential Problems

Prices of food may rise, payment will have to be adjusted to cover changes in costs,

Some people will try to obtain additional payments by falsifying identities,

Head of household is likely to control funds; in some cases, money may be used to purchase goods other than necessities,

Some households may be left out.

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Other Issues

New system does not need to be introduced everywhere at one time; both systems can work concurrently Program should be introduced neighborhood-by-neighborhood

People assigned to selected food agents will be assigned to banks or post offices or their agent to get cash,

Changes in consumption patterns will be surveyed,

Trials will help determine how much money is necessary to cover costs of food rations

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TRANSITION FROM HANDOUTS TO MARKETS

The Pilot Concept and Planning

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The move from food rations to cash payments should be carefully planned:

It should proceed incrementally, with certain areas of the population transitioning to receiving cash payments while other areas remain receiving food,

The phase in should, however, be as simple as possible to ensure that the recipients and the other participants in the system can understand it and are transitioned as smoothly as possible

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The Pilot concept and Planning

To run a trial, the following steps will have to be taken:

Choose appropriate sites and logistics Identification of some districts where there is mix of classes with the

majority of working class and poor population The district contains a Registration Center or a sub regional office The district should contain Public Distribution/Food Distribution

Locations and food supplies retail shops Control sites in similar area also need to be selected Survey instruments need to be drawn up and given in both the experimental and

control sites before the program begins. After the surveys are taken, the population in the selected sites needs to be well

informed about the program Owners and employees of food distribution points need to be interviewed before the program to understand their role in the former system and to benchmark changes

After the first month, monthly surveys should continue to be taken in both the control and test areas for several months, possibly for a year, to evaluate what has happened

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Food Distribution Issues It is necessary to take measures to ensure combination of private and public food distribution. The warehouses and distribution routes that supply current food rations to recipients in trial areas will need to be commercialized or privatized so that current food agents and retailers can purchase goods to be sold to consumers

Money Distribution Issues Because the retail bank system is in its infancy, the number of household accounts is

small and the ability of the commercial banks to handle large numbers of accounts and account transactions is very limited. It is important that have the fololowing options: Bank, Post Office, and Agents

The first order of business will be to collect computerized lists of individuals receiving

food through the current PDS system in the trial neighborhoods. The list will then be used to determine cash payments. Bank and Post Office facilities will need to be assessed and equipped/refurbished to handle the additional customer flow. A service fee will need to be determined to cover expenses incurred by banks and post offices for providing this service. Tellers will need to be trained and provided appropriate incentives to give cash to authorized recipients only. Means of confirming receipt also need to be devised. A thumb print and signature or mark would appear to be good options

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Social Issues Those that Fall through the Cracks. In all payment programs, people fall through the cracks.

Registration cards are lost, payments stolen, people are not registered, etc. Although the system needs to be as foolproof as possible, it will still not be 100 percent successful.

Some institutions that will need to be taken into consideration are orphanages, hospitals and prisons. A policy will need to be devised in a way that provides payment to these organizations so that resources will be available to feed those individuals in an institutions care.

The program will need to have regional ombudsmen to whom people will be able to complain if they are unsuccessful solving their problems through official channels. Ombudsmen need to be selected for the trial locations.

It would also make sense to launch an outreach program to local mosques and charitable organizations in the trial districts, asking them to be prepared to help individuals that may not get their money on time.

Gender Problems It is important to minimize the risk of patriarchal domination of these new financial flows in the

transition period. In other societies, this is done by tying payments to the mother in a two-parent household. Ideally, it might make sense at this time to make payments to all individuals over 18 years old, but this would require revising the current ration card dataset. If the system moves to electronic payments and accounts, this move would provide some defense for women to keep some of the money rather than all of it go to the head of household. It also might make sense to assign children’s transfers to the mother rather than to the head of household.

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Organizational Issues Arranging trials will take a substantial amount of coordination. Some institution needs to be designated to obtain and arrange for the distribution of cash. The Ministry of Finance needs to be involved in the determination of this institution and cash transfers. The Ministry of Trade needs to halt provision of food to local food distribution points. Contracts need to be issued to conduct and collate survey data. And a team needs to be set up to modify the program to solve problems identified during implementation and from the surveys. This team also needs to be tasked with expanding the program to other neighborhoods so that a large enough group of people are operating on the cash system to have an impact on the distribution system

Timing and Phase InIt is recommended starting the program in the middle of the month for the trials. The logistical problems of building in expectations that cash will become available every month on the first are so large that it would be good to start the program on a rolling basis. Later, when the “Smart Card” system is up and running, we could gravitate back towards a single day upon which money is made available. The mid-month start also provides leeway to delay the introduction as operational hitches are worked out. To provide a safety net, all recipients would continue to enjoy the use of ration cards during the month. In essence, they would receive a “bonus” for participating in the program. However, this means that follow up questionnaires should be delayed until after the second payment when recipients will be operating solely on the cash program. These first trial groups should also be the first to transition to the “Smart Card”. They will provide a better test group for the “Smart Card” as they will already be accustomed to purchasing their food rather than operating on the ration card system. The use of these groups will help us to better determine specific problems with the “Smart Card” rather than problems involved in shifting from coupons to purchasing food. The trial groups will also be used to being “Guinea pigs.” Researchers often find people enjoy being involved in surveys. Continued involvement reduces the costs of identifying participants, educating them, and doing follow up.

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Practical Steps

Set up a high level committee to initiate the new system and to subsequently monitor the development. The committee should make the following decisions:

a) Request ministry of finance to set up a budget for the project

b) Assign the new system to an organization or Ministry of Trade to administrate it. The organization should be empowered to take all necessary actions.

c) Set a media committee

Documents

Iraq Institute for Economic Reform 1 Monetization of Food Basket 21st November, 2004