In a report on the controversial policy of the government to subsidize foreign currency for basic imports, the Majlis Research Center said it is ill-advised and a waste of scarce national resources.
The center highlighted deep flaws in the policy compared to its meager benefits and criticized the Rouhani administration for perpetuation of one policy that proved ineffective and chaotic in the past two years.
Drawing on the provisions of the budget bill for the next fiscal year (starts March 20), the parliamentary think tank said the government has proposed $10.5 billion in subsidized foreign currency for importing basic goods (food and medicine) and machinery.
A subsidized US dollar costs 42,000 rials but is priced around 154,000 rials in Tehran’s open market. The greenback is sold for 138,000 rials in the secondary market, known as Nima, which has been set up especially for import and export companies to buy and sell currency.
High and systematically rising government debt to the Central Bank of Iran, unwarranted demand for basic goods and the negative impact on domestic manufactures are some of the ramifications of the haphazard policy which far outweighs its positive side, the MRC said in the report posted on its website.
Visible Mismatch
The influential think tank pointed to a mismatch between government income and expenditure. Earnings via oil exports and sale of oil products in the first eight months of current calendar year (March-Nov 2019) accounted for almost half of the currency given to importers to buy food, pharmaceuticals and machinery.
According to MRC, the government sold crude oil and oil derivatives worth 260 trillion rials (or $6.2 billion) at subsidized rates during the seven months. This is while the value of imported basic goods amounted to $8.39 billion during March-Dec 2019, according to customs data.
As per budget rules, subsidized currency should be sourced from government earnings from gas and crude oil export.
MRC assumed that the government has either borrowed from the National Development Fund (the sovereign wealth fund) or borrowed national currency from the CBI to buy forex at the secondary market only to sell it cheaper to importers.
“If either assumption is correct, it is an indication of a lack of foresight in making currency-commercial policy under the sanctions regime,” the MRC said.
This will add to government debt to the CBI because the former has to buy currency from the latter at Nima rates and sell it to importers at subsidized prices.
Rising Imports
The subsidy policy has also led to remarkable rise in imported basic goods. According to customs statistics, import of essential goods shot up 15.85% and 12.79% annually in value and volume during the first three quarter of the current fiscal year (March 2019-Jan 2020).
It also merits mention that increase in imports of basic goods is not compatible with consumption inside the country.
According to the think tank, consumption of basic goods declined 14% in the last fiscal year and the descending order is expected to continue this year given the huge hike in prices.
Juxtaposing increase in import with decline in consumption, MRC says “this is nothing but waste of resources, smuggling of [imported] goods and rent-seeking by importers.”
These arguments have thus far failed to persuade the government to scrap the forex subsidy policy because its advocates seemingly come up with a stronger counter argument, i.e. supporting the low income strata by preventing rise in basic goods’ prices.
Experts and market observers often remind the government and its policymakers that consumers of essential goods ultimately procure their needs at open market rates due to the dysfunctional state distribution system and lack of strong government oversight.
“In essence, a significant portion of the ‘implicit subsidy’ is channeled to importers and the distribution chain, instead of end customers,” the MRC said.
Subsidized forex was earmarked following steep rise in currency rates in the spring of 2018 when the government imposed a fiat currency rate and shortened the list of goods eligible for subsidized currency to a few essential items, namely food, raw material and pharmaceuticals.
“After the lapse of two years, there is evidence that the policy did not deliver because target groups did not benefit” and were left to their own devices, the think tank complained.
While acknowledging price spikes if the government ets rid of the subsidy policy, the MRC argued that it’s inflationary impact would be insignificant compared to the inflation arising from ballooning budget deficits due to the controversial currency subsidy policy.
