The Plan and Budget Organization (PBO) has defended the government’s decision to end its forex subsidy policy basic imports.
In a statement released Monday the PBO responded to a group of 61 independent economists who have strongly criticized the government’s economic performance.
On May 10, the government officially put an end to the decades of highly controversial currency subsides ($1= 42,000 rials), better known as preferential currency, which was given to importers of essential goods like food, medicine and some raw materials.
Along with other oft mentioned reasons for scraping the cheap currency, the PBO highlighted the threat of “high powered money” as a cogent argument that persuaded the Raisi administration to abandon the policy.
“By eliminating the subsidized currency, the government is determined to ease some of the mounting pressure on high-powered money, particularly in the long-term,” the PBO said, IBENA reported.
“Subsidized currency had turned into one of the reasons behind money issuance, which by extension gives rise to high and rising increasing.”
The economists who took issue with the government’s economic policies, described it is as “economic surgery” and a “hasty move” especially at a time when the people are grappling with dire economic conditions.
They noted that scrapping the currency subsidy is apparently with the precise aim of plugging the deep budget deficits of the government and compensate its declining revenues. The economic experts urged the government to instead cut spending.
The removal of subsidies has unleashed a tsunami of high consumer prices unseen in Iran’s history adding pressure on the masses as the cost of living has jumped making it extremely difficult, and for some impossible, to make ends meet.
The government has said that it is “paying s cash subsidy to offset the soaring prices.”
Cheap currency was sourced from oil export revenue and used for importing basic goods to avoid unaffordable price hikes of food and raw materials.
On how the currency subsidy policy would impact the monetary base and inflation, the Central Bank of Iran said earlier that income from crude oil export was not enough to pay for imports and that “on many occasions it was compelled to consume its own resources.
“The CBI had to buy currency from the Nima market at higher rates only to spend it at lower rates for imports,” Payman Qorbani, the CBI deputy for economic affairs said.
Nima is a CBI-affiliated currency trade platform in which exporters sell their forex income to importers. The rates at Nima are almost six times the subsidized rates.
According to Qorbani, that practice had expanded the monetary base, which ultimately lead to galloping inflation.
In the same vein, Ali Salehabadi, the CBI governor, also concurred that the CBI at times had to buy currency from exporters at higher rates and sell it much cheaper to importers of basic goods.
As per official reports, the currency subsidy policy added 1,100 trillion rials ($3.5 billion) to the money supply in fiscal 2021-22.
