The Iraqi Public Distribution System is the largest universal,
in-kind subsidy system in the world. In 2012, the Public
Distribution System transfers accounted for as much as 30
percent of incomes of the poorest 10 percent of the Iraqi
population and provided 70 percent of the calories of the
poorest 40 percent. In effect, the Public Distribution System
remains the only safety net program that covers all the poor
and vulnerable in the country. Yet, it is a very inefficient and
expensive means to deliver transfers to the poor and creates
distortions in the economy as well as an unsustainable fiscal
burden. The fiscal crisis since mid-2014 has put reform of
the Public Distribution System back on the agenda. This
paper employs a mixed demand approach to analyze the
consumption patterns of Iraqi households and quantify the
welfare impact of a potential reform of the Public Distribution
System in urban areas. The results show that household
consumption of Public Distribution System items is relatively
inelastic to changes in price. Consumption is more
inelastic for the poorest quintiles and, for much of the
population, these goods are not inferior, but rather normal
goods. Cross-sectional comparisons suggest that with
improvements in welfare levels, and with well-functioning
markets, some segments of the population are substituting
away from the Public Distribution System and increasing
their consumption of market substitutes. The removal of
all subsidies will require compensating poor households
by 74.4 percent of their expenditures compared with
nearly 40 percent for the richest households in urban areas.