Demand for subsidized foreign currency declined by almost $2 billion since the end of the subsidized forex policy six months ago, compared with the same period last year, the spokesman of the Central Bank of Iran said.
“During the period under review (March 21-Sept. 22), global prices for essential goods increased largely due to international circumstances. The result was an increase in demand for forex for imports in most countries.
However, with the end of forex subsidies for the import of essential goods in Iran we managed to reduce currency demand in the country,” Mostafa Qamari-Vafa was quoted by IBENA as saying.
Costly forex subsidy ($1=42,000 rials) was given by the government under former president Hassan Rouhani and was seen as unsustainable and highly controversial by some economists and the Raisi administration, ultimately resulting in its elimination.
“During the same period, we saw a rise in the [international] price of oil and oil derivatives which increased our forex revenue from exports and by extension currency supply to the market. Exporters are now encouraged to sell their forex in the secondary foreign exchange market, known locally as Nima. Over the six-month period, Nima forex supply amounted to nearly $20 billion, up from $11 billion during the same period of last year,” Qamari-Wafa said.
Nima is an online platform affiliated to the CBI where exporters sell their overseas currency and companies buy for importing goods, machinery, equipment and raw material.
The CBI official noted that elimination of forex subsidies put an end to the artificial demand for subsidized forex, adding that it was a failed policy which paved the way for corruption, nepotism and rent-seeking, lining the pockets of vested interests at the expense of the public.
Forex subsidy was sourced mainly from oil export that has plunged to unprecedented levels (though the situation has improved since January as oil imports increased) due to the US economic blockade and was used only for importing food, essential goods, pharmaceuticals and machinery.
Also known as necessity or basic goods, essential goods are products consumers buy, regardless of changes in income levels, such as rice, vegetable oil, sugar and wheat.
While successive governments have subsidized food imports, cheap currency in its last format was first given after the steep rise in currency rates in the spring of 2018 soon after the United States abandoned the 2015 Iran nuclear deal and imposed tough economic sanctions.
Major Drawback
“One major drawback of forex subsidies was that essential goods were imported at lower than global prices and later smuggled to the neighboring countries at international rates. This malpractice ate away at the country’s [limited] forex resources.
Moreover, with cheap imports flooding the market domestic producers and farmers were dismayed as they lost their fair share to cheaper imported products.”
The official said that soon after forex subsidies became history, demand for imported essential goods declined and so did smuggling.
“The government is now supporting local production. A good example is the 60% rise in guaranteed purchase of wheat this year which reduces import demand by almost three million tons.”
The government bought 7.15 million tons of wheat worth more than 827.86 trillion rials ($2.6 billion) from local farmers since the beginning of the harvest season in late March up until mid-September – up 60% in tonnage compared to the same period last year, according to Saeed Rad, CEO of the Government Trading Corporation.
Every year, the government buys strategic crops, including wheat, beetroot, tea, barley, cotton boll and oilseeds from local farmers at guaranteed prices to control the domestic market and replenish its strategic reserves.
The government has said it has earmarked 1,000 trillion rials ($3.5 billion) in the 2022-23 budget to help compensate the elimination of forex subsidies for the poor, fixed-wage earners and those at the end of the economic ladder.
Last year (March 2021-22) 30.9 million tons of basic goods worth $19.6 billion were imported, which was up 32% and 60% in volume and value, respectively, on the year before. An estimated 26.9 million tons of the imports worth $15.1 billion were undertaken using subsidized currency and the rest with Nima currency rates.
