Government policy of giving billions in subsidized currency for importing basic goods must be blamed for the exploding monetary base and rampant inflation, a senior official at the Central Bank of Iran said.
Reiterating that the long prevailing multiple exchange rates have been a bane of the economy, Payman Qorbani, the CBI deputy for economic affairs singled out the inherent flaws in the decades of forex subsidies allocated for basic imports.
Following the steep rise in forex rates, the former government in 2018 embarked on a new policy to subsidize currency for import of food and medicine pegging the US dollar at fixed rate of 42,000 rials. The rate was and still is less than a seventh of the prices in the open market.
Cheap currency is sourced from oil export revenue and used only for importing basic necessities to avoid unaffordable price hikes in food, pharmaceuticals and raw materials.
On how the forex subsidies impact the monetary base and inflation, Qorbani said over the years currency income from oil/gas export was simply not enough to meet rising demand.
“Because oil export revenue was way below than the currency needed for import, the CBI was forced to draw on its own resources,” he was quoted as saying by the CBI website.
“Circumstances were such that the CBI had to buy currency [at higher prices] from the secondary market and sell it at lower rates for imports.”
The secondary market is a CBI-affiliated currency trade platform (known locally as Nima), in which exporters sell their proceeds to importers. Rates at Nima are almost six times higher than the subsidized currency.
“The practice has given rise to the monetary base, which ultimately led to inflation,” Qorbani said.
The controversial forex subsidy policy also is a matter of serious concern for other economic decision-makers, including the Governor of Central Bank of Iran Ali Salehabadi.
Outlining the root causes behind the ballooning money supply, Salehabadi earlier concurred that the CBI at times had no option but to buy currency from exporters at higher rates to sell them cheaper to importers of basic goods as the country was facing a huge currency deficit due to the US sanctions.
Salehabadi said the currency subsidy policy added a further 1,100 trillion rials ($4 billion) to the money supply in fiscal 2021-22. The monetary base was 4,559.5 trillion rials ($16.2b) in March 2021
Recent CBI data show that the monetary base reached 6,280 trillion rials ($22b) in March 2022 – up 31.4% y/y.
*** Struggling to End the Failed Policy
The Raisi administration is under mounting pressure to end controversial subsidy policy or at the least overhaul the manner in which subsidized currency is allocated.
While drafting the 2022-23 budget last winter, the government proposed a permanent end to the subsidy policy but the Majlis did not agree, apparently fearing its inflationary consequences and harmful impact on the livelihood of the large majority of the people.
Subsidies are given largely for importing medicine, wheat and oilseeds. As per the provisions of the budget, the government plans to pay cash subsidy to selected groups of the needy instead of subsiding the imports.
Last month, the Economy Minister Ehsan Khandouzi said the government is determined to gradually eliminate subsidized currency this year.
Economists and policymakers who oppose ending subsidized imports argue that the inflation rate officially is around 45% while the prices of food and medicine are going through the roof. The end of subsidies will be another big shock to the poor, fixed-wage earners and those at the end of the economic ladder.
While successive governments have routinely subsidized food imports, cheap currency in its current form was offered after the steep rise in forex rates in the spring of 2018 when the government pegged the dollar at a fixed rate of 42,000 rials and slashed the list of goods eligible for subsidized currency to a few essential items.
The subsidy currency policy is also highly criticized for its inherent rent-seeking feature. There is a general consensus among academia, economists, experts and market observers that the subsidy policy has all but failed, is prone to shocking levels of corruption and did not fulfill its real goals.
