In a meeting with President Ebrahim Raisi late Tuesday economists again raised years-long concerns over the controversial procedures to allocate subsidized currency for import and ways to put a permanent end to the apparently failed strategy.
The former government over three years heavily subsidized the currency for importing food and basic goods ($1=42,000 rials).
The rate was, and is, a seventh of its value at the open market.
Almost all governments in the past several decades stuck to the forex subsidy policy to control prices of food and consumer goods and maintain social stability. Obviously forex then was subsidized at much lower rates.
There are divergent views on the entire subsidy structure. All said, the tens of billions of dollars in subsidies given to unruly importing companies was often embezzled and failed to produce the desired results -- keeping food prices in check.
The vast majority of academia, economists and social experts are in favor of scrapping the forex subsidies. Some, however, express concern over higher inflation that would result after getting rid of the cheap currency and argue that the people at the lower-end of economic ladder would suffer.
Ebrahim Sheibani, a former governor of the Central Bank of Iran, told the high-powered meeting that the subsidy policy is prone to corruption and rent-seeking.
“Dual or multiple exchange rates means corruption and there is no doubt that it is a breeding ground for rent-seeking,” IRIB news website quoted him as saying.
The former banker, however, was skeptical about the consequences of scrapping the policy under the present dire economic conditions with official reports putting the inflation rate in recent months at 50% and above.
“If you ask me whether or not this is the right time to eliminate forex subsidies for basic imports, I would say no!”
Davood Danesh Jafari, a former economy minister, held a different view. He said getting rid of the subsidy policy is at odds with the government’s declared goal of promoting social justice and equality.
“When the president talks about preparing the next budget, he emphasizes an equality-centered approach. Thus, ending currency subsidies doesn’t fit with this vision.”
In a talk with Fars News Agency, Ahmad Tavakol, an economist who attended the meeting, said he had proposed putting the costly subsidies, but to compensate for undoubted inflation in the aftermath the government must offer cash to the vulnerable strata.
President Raisi underscored the sensitivity of the matter and said any decision regarding subsidized currency must be “tactful and calculated”.
“There is unanimity that the current method of granting forex subsidy is not appropriate,” he said.
Cheap currency is sourced from oil export revenue, which has shrunk to historic lows due to the US sanctions, and is used only for importing essential goods, pharmaceuticals and machinery.
A Policy Failure
Iranians from all walks of life, businesspeople, lawmakers and government officials, have always complained that the currency subsidy policy is, and will always be, a failure and has pushed corruption, nepotism, cronyism…to levels unseen in Iran’s modern history.
Experts rightly point out that the huge difference between the subsidized currency rates and the open market has been a devastating temptation for those illicit wealth and power.
As per the provisions of the March 2021-22 budget, the government is obliged to end the subsidies by next spring but has serious reservations about what such a move could do the already chronic inflation.
In the current budget, subsidizing foreign currency is envisioned to stay only for the first six months (ended on Sept. 22).
Forex subsidy in its current form was offered after the steep rise in currency rates in the spring of 2018 when the government fixed the dollar at 42,000 rials and drastically cut the list of goods eligible for the subsidized currency to a few essentials, mainly food.
Economists also have largely faulted the subsidy distribution system and the absence of efficient government oversight. They point out that people buy food and other essential goods at open market rates despite the fact that the same goods are imported at highly subsidized rates.
