Government Changes Import Subsidy Allocation System

Government Changes Import Subsidy Allocation System
Government Changes Import Subsidy Allocation System

The government began depositing 3–4 million rials ($10.5-14) in cash subsidies for the first to ninth income deciles around midnight Sunday to make up for the removal of the controversial policy that has seen billions of dollars spent on imports of essential goods with the aim of lowering their prices.
In a late-night televised speech, President Ebrahim Raisi announced the official end to the allocation of cheap dollars at the rate of 42,000 rials per dollar, locally known as preferential foreign currency, to importers of essential goods, including corn, soymeal, unprocessed oil, oilseeds and barley, in addition to wheat, flour and medicine, the way the government has been paying to date.
The market value of the dollar is above 280,000 rials now.
The so-called Subsidy Targeting Organization has announced that income deciles 1, 2 and 3 (the poorest) are entitled to 4 million rials while deciles 4-9 receive 3 million rials in new cash subsidies.
However, the organization noted that the sum may not be withdrawn by the recipients until further notice.
The government has already been paying a monthly sum of 455,000 rials (about $1.5) to select groups of households for many years now.
As Economy Minister Ehsan Khandouzi explained, the 3–4 million rials pertain to the new subsidy plus that of the previous scheme.
A total of 23 million Iranian households, including 72 million Iranians, were entitled to the new payments, IRNA reported, citing the Subsidy Targeting Organization.
The Central Bank of Iran announced on Monday that more than 400 trillion rials (about $1.4 billion) were deposited to the account of those entitled to the subsidies.
In his speech, Raisi emphasized that the removal of cheap dollar allocation will not lead to a price rise in wheat, flour, medicine and petrol.  
He also noted that the new subsidies will be deposited every two months until the introduction of an electronic coupon system for supplying essential goods at cheaper prices in the market.
“Until now, we have been paying to producers [read importers] but now the subsidies will go to consumers. In fact, the preferential foreign currency has not been ceased, rather the allocation method has changed,” the president emphasized.



Breeding Ground for Corruption

The president explained that the former allocation system gave rise to corruption for years, which led his government to come up with the new scheme.
While successive Iranian governments have subsidized food imports, cheap currency was first given after the steep rise in foreign exchange rates in the spring of 2018 soon after the United States abandoned the Iran nuclear deal and imposed tough economic sanctions.
Flaws in the apparently ill-advised policy emerged in the first few months after the scheme’s inception and the government was compelled to slash the list of goods eligible for subsidized currency.
Prominent economists, academia and socioeconomic experts strongly believe that the forex subsidy policy never achieved its intended goal of supporting the downtrodden, and greedy middlemen and state cronies in the distribution chain benefited the most.
On many occasions, consumers of imported essential goods must buy their needs at prices that equal open market forex rates, thanks to the gross mismanagement, inefficient distribution system and absence of viable government oversight.
In short, a significant portion of the cheap forex is pocketed by big importers and the distribution chain instead of end customers, which ostensibly means the millions of Iranians at the lower-end of the economic ladder.
It is often said in Tehran’s politico-economic circles that in the past three years, billions in subsidized currency were given to selected companies to import food and medicine, yet some of these companies simply did not bring anything into the country.  
It later turned out that some of the firms who took the scarce forex resources were shell companies. Few, if any, have paid for the thefts or faced the full force of the law.
Notably, a survey of by the Statistics and Economic Analysis Center of Iran Chamber of Commerce, Industries, Mines and Agriculture indicated that mismanagement in subsidy allocations is one of the main problems facing local businesses.
“There is no supervision over the government’s method of payment of subsidies to some goods such as food and pharmaceuticals. The subsidy is either exported via customs or smuggled out,” found the survey, which was part of the Purchasing Managers’ Index report in the final months of last fiscal year (ended March 20, 2022).



$17.5b Spent on Essential Goods’ Imports in 11 Months

A total of 27.61 million tons of essential goods worth $17.53 billion were imported into Iran during the 11 months to Feb. 19, registering a 28% and 60% year-on-year rise in weight and value respectively, according to the spokesperson of the Islamic Republic of Iran Customs Administration.
Also known as necessity or basic goods, essential goods are products consumers will buy, regardless of changes in income levels. 
The essential goods’ imports accounted for 75% of the tonnage and 38% of the value of total imports during the period under review, Rouhollah Latifi was also quoted as saying by Mehr News Agency.
According to IRICA, total (essential, non-essential) imports stood at 36.77 million tons worth $46.57 billion during the period, registering a 19% and 36% YOY increase in volume and value respectively.
According to the official, 24.03 million tons worth $13.67 billion were imported using subsidized foreign currency at the rate of 42,000 rials per dollar, registering a 30% and 77% YOY rise in weight and value respectively.
The essential goods imported at the so-called “preferential” rate (42,000) included 8.65 million tons of corn worth $2.99 billion (down 6% in weight and up 29% in value), 1.87 million tons of unrefined and edible vegetable oils worth $2.55 billion (up 81% in weight and 185% in value), 19,889 tons of pharmaceuticals and medical equipment worth $2.35 billion (up 46% in weight and 58% in value), 6.04 million tons of wheat worth $2.08 billion (up 108% in weight and 157% in value), 2.25 million tons of oilseeds worth $1.58 billion (up 10% in weight and 47% in value), 2.26 million tons of soymeal worth $1.23 billion (up 40% in weight and 78% in value) and 2.93 million tons of barley worth $873.76 million (up 72% in weight and 17% in value).
Latifi noted that 3.58 million tons of essential goods’ imports worth $3.86 billion were purchased using “non-preferential” resources, registering a 20% rise in both volume and value compared with the corresponding period of last year.
“The goods included 1.36 million tons of rice worth $1.15 billion (up 49% YOY in weight and 40% in value), 1.15 million tons of unrefined sugar worth $518.03 million (up 13% in volume and 40% in value), 39,190 tons of machinery used in production of essential goods worth $366.82 million, 84,015 tons of heavy vehicle tires worth $303.69 million, 166,560 tons of fertilizers worth $124.46 million, 9.789 tons of pesticides and insecticides worth $91.54 million, 482 tons of veterinarian medicines worth $50.47 million and 776.65 tons of other goods, mainly red meat, chicken, eggs, pulses and tea, worth $1.25 million (up 12% and 19% in weight and value respectively.”
By non-preferential, the official was referring to the allocation system where dollar is provided at rates above the preferential rate, but still below market prices.

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