The Governor of Central Bank of Iran Ali Salehabadi says the government’s move to pay new cash subsidies would have little impact on money supply with no significant inflationary consequences.
In a talk with state TV at the weekend, Salehabadi spoke about the potential monetary impact of the recent government decision to scrap the costly forex subsidy policy, which so far has more than doubled the prices of key food items like cooking oil, chicken, poultry and dairy products.
“The inflationary impact of cash distribution arising from expansion of broad money is out of the question,” he was quoted as saying by the CBI website.
The senior banker, however, did not reject the inflationary impact of the decision resulting from anticipated supply shocks.
Earlier in the week, the government officially put an end to the allocation of subsidized forex ($1=42,000 rials), locally known as preferential foreign currency, to import essential goods, including corn, soymeal, unprocessed oil, oilseeds and barley, in addition to wheat, flour and medicine.
The CBI began depositing 3–4 million rials ($10.5-14) in cash subsidy for the first to ninth income deciles to make up for the ending the previous policy that has seen billions of dollars spent on importing essential goods with the aim of controlling prices.
The central bank said 400 trillion rials (about $1.3 billion) was deposited into the account of those entitled for the new cash payments.
Subsidized currency was sourced from oil export revenue and used only for importing basic necessities to avoid price hikes in food and raw materials.
Salehabadi said that the cash subsidy too would come from oil export but the method of subsidy payment has changed.
“In the past the subsidies were given to import companies in the form of cheap currency but now it is directly given to the end consumers.”
“In the new method, the currency revenue from selling oil, gas and oil products are sold at Nima rate and the difference is paid in rials to those eligible. Thus, the presumption that this would lead to [higher] inflation as a result of creating new money is irrelevant,” he noted.
Nima is a CBI-affiliated currency trade platform in which exporters sell their export proceeds to importers. The rates at Nima are almost six times higher than the subsidized rates.
Salehabadi said the central bank expects around 10% inflation in prices due to the cash subsidy distribution and the ensuing shock on the supply side.
Subsidized Currency Blamed for Money Supply Growth
The CBI has blamed government policy to give cheap currency for imports for the exploding money supply and hyperinflation.
Reiterating that multiple-exchange rates is a bane of the economy, Payman Qorbani, the CBI deputy for economic affairs, earlier in the week recounted the flaws with subsidizing currency for import.
On how the currency subsidy policy may impact the monetary base and inflation, Qorbani said the declining currency income from crude oil export is not enough to meet currency needs for import.
“Given that oil export revenue was lower than the currency needed for import, the CBI was forced to use its own resources,” to pay for imports, he was quoted as saying.
“Moreover, the CBI on multiple occasions had to buy currency at [higher] Nima rates only to sell it at lower rates for imports.”
“The practice pushed up the monetary base, which ultimately led to inflation,” Qorbani said.
Salehabadi earlier concurred that the CBI at times had to purchase forex from exporters at higher rates to sell them cheaper to importers of basic goods when the country was facing huge foreign currency shortages due to foreign sanctions.
He said the currency subsidy policy added 1,100 trillion rials ($3.6 billion) to the money supply in fiscal 2021-22 alone.
The monetary base was 4,559.5 trillion rials ($15.2b) as of March 2021. Recent CBI data show it jumped to 6,280 trillion rials ($21b) by March 20, 2022 – up 31.4% in 12 months.
While successive governments as a matter of socioeconomic policy 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 42,000 rials and cut the list of goods eligible for subsidized currency to a few essentials.
