A poll conducted by Iran Chamber of Commerce, Industries Mines and Agriculture (ICCIMA) shows that most businesses are now struggling with the rising need for liquidity after the government restructured its forex subsidy policy.
Of the 115 companies polled, 91% procured 55% of their raw material and production input needs via subsidized currency.
On May 10, the government officially ended the forex subsidy policy or the so-called preferential foreign currency.
Highly subsidized currency was used by importers of key essential goods, namely corn, soymeal, unprocessed oil, oilseeds, barley, wheat, flour and medicine.
Close to 90% of the respondents said the elimination of subsidized currency has pushed up their chronic need for working capital. The increase varies across manufactures, but on average has rocketed 207% compared to the past.
For example, due to the elimination of currency subsidies, edible oil producers' need for cash has ballooned by 482%. This increase is 265% for meat producers, namely poultry farms and animal husbandry.
Likewise, dairy producers and pesticide companies must increase working capital by 219% and 209%, respectively. The list is long.
Impact on Business
As per the ICCIMA poll, the end of forex subsidy has also hurt manufacturers who forever depended on cheap currency.
According to the ICCIMA, 77% of the respondents said the move “will significantly hurt sales”. They expect a plunge of 48% on past sales.
Likewise, 16% of respondents said procuring raw material will now be more difficult, 37% said it would help while 39% were of the opinion that their access to production input would not be harmed.
Asked how the government should support them after terminating forex subsidies, most respondents said it needs to lift export bans and stop intervening in prices now that it no longer gives subsidies for import.
Ignoring Inherent Challenges
While most private business leaders have welcomed the end of currency subsidies largely due to the harmful impact on the economy, they criticize the government for ignoring the challenges manufactures can and face in the not too distant future.
Earlier private firms complained that the government was indifferent to the almost certain problems manufactures would encounter when the forex subsidy policy became a thing of the past.
Businesses rightly note that when the forex subsidy dossier is closed for good they would need much more cash infusions to import expensive raw material. Add to this the rise in production costs as result of the huge gap between subsidized currency rates and the open market.
Hassan Frouzan Fard, a member of ICCIMA earlier said that manufactures are saddled with high and rising need for liquidity, declining demand and high production costs.
“After scrapping the preferential currency, the government should create a funding mechanism via banks at least for a short period to help producers meet their cash needs,” he said.
Ali Asghar Zebardast, head of the Hamedan Chamber of Commerce, Industries, Mines and Agriculture, shared similar concern, urging the Raisi administration to support manufacturing companies with enough cash to be able to function.
Subsidized currency was secured from oil export and used largely for importing basic goods to avoid price hikes in food and raw materials.
While successive governments have routinely subsidized food imports, cheap currency in this form was offered after the steep rise in forex rates in the spring of 2018 when the government set the dollar at fixed rate of 42,000 rials and cut the list of goods eligible for subsidized currency to a few essential goods.
The subsidy currency policy was criticized for its inherent rent-seeking feature. There was consensus among academia, economists, experts and market observers that the subsidy policy was all but a gross failure, prone to corruption and did not fulfill its desired and declared goals.
The government says it is determined to pay cash directly to constituencies at the lower-end of the economic ladder to compensate the end of the controversial forex subsidy policy that was riddled with corruption, rent-seeking, fraud and theft of billions of dollars.
