The time is not right for the government to end the contentious practice of paying subsidies for importing essential goods.
This was stated by Albert Boghzian, an economist and university professor, in a write-up for the Persian-language daily Ta’adol. A translation of the text follows:
Time and setting are of key importance when it comes to decision-making; that’s an ancient piece of advice given by sages old and new. So many right decisions made in the wrong place at the wrong time have backfired and even worsened the situation.
Subsidized forex policy has turned into a brain-crunching conundrum in Iran’s economy. On the one hand, the government has revealed its intention to discontinue the allocation of foreign currency at the rate of 42,000 rials per US dollar for importing essential goods. On the other hand, members of the parliament and a group of economic experts have forewarned about the negative consequences of taking such a grave decision at the wrong time.
All experts concur that the economy has been plagued by the controversial distribution of cheap dollars, but what is more important is when and how the government should call time on this decay.
Still reeling from the devastating impacts of Covid-19 pandemic, sanctions and measures taken by the Financial Action Task Force (an intergovernmental organization that monitors money laundering and terrorism financing worldwide), Iran’s economy will face scores of new challenges in the event of the abrupt termination of forex subsidies.
The government says it’s hell-bent on ending forex subsidies, yet fearing the potential fallouts, it wishes to find a partner in crime to shift the blame, if the need arises.
On the one hand, the government intends to discontinue the allocation of foreign currency at the rate of 42,000 rials per US dollar for importing essential goods and on the other, parliamentarians and a group of economic experts have forewarned about the negative consequences of taking such a grave decision at the wrong time
Such a fear, I believe, stems from not having a plan. In other words, the government does not have a well-thought-out plan. Naturally, human beings fear the unknown. Planning sheds light on the hidden aspects of issues. Let’s throw some light on remarks made by MPs in this regard [on Wednesday].
Several legislators have talked of the government’s determination to end forex subsidies, though it has not put forward a decent plan in this regard to the parliament. The government’s economic team has not determined the destination of freed-up resources, which is said to be around 4,000 trillion rials, i.e., half the budget, once the forex subsidies are removed.
According to the minister of economic affairs and finance [Ehsan Khandouzi], less than 15% of this sum will be added to the monthly cash subsidies people receive now. What will become of the remaining 80-85%? It is unclear.
This is while assessments show that not long after the implementation of the decision, inflationary shocks of up to 50% (besides the country’s in-house inflation) will come through. But the government neither has a comprehensive, practical plan to support people, nor does it have an intention to strengthen supervisory approaches in the markets. Future probabilities have not been considered by the government, either.
Comments made by the members of the government economic team suggest a sort of optimism on their part. For example, the Plan and Budget Organization has put the inflation arising from the removal of subsidies at 20%; analysts say such an estimate is not aligned with market realities. Ambiguities like this keep economic experts awake at night.
Prior to taking such tough decisions, a special taskforce must be formed; each and every stage of the operation must be planned in advance. The government says forex subsidies have given rise to rent-seeking practices but has opted for the sudden removal of forex subsidies instead of strengthening supervision over the allocation process; the move will definitely bring about adverse effects on households’ livelihoods.
Such a plan needs to be carried out gradually. Firstly, the reliance on subsidies should be lessened and then the economy should be prepared for a new era. Warehouses must be filled with essential goods.
The government should prepare for a stronger foreign currency demand once the subsidies are discontinued.
And finally, I believe that the time is not right for ending the subsidized forex policy. Iran’s economy is suffering from recession and inflation at the same time.
Covid-19, sanctions, mismanagement and what not have led to widespread pessimism among the public and economic players. A more sensible strategy is for the government to first have successful nuclear negotiations and come up with needed foreign currency resources and then convince the public of the need to solve forex subsidies issue and finally introduce the reforms.
People are sick and tired of the constant trial and error failures of government officials. The public wishes to see an improvement in their economy and livelihoods.
