In a report analyzing drawbacks of the allocation of subsidized currency to import essential goods, the Majlis Research Center says the policy is inefficient and a new mechanism is needed to support the low-income strata.
Drawing parallels between the inflation rate at the end of 2017-18 and the month to February 20, using the Consumer Price Index, it said the CPI for essential goods shot up over 53%. This is while the figure for non-essential goods jumped 85%.
In a rather sarcastic manner, the influential think tank says, this “achievement has come at the expense of spending over $14 billion on importing essential goods” at a time when the country is facing chronic shortages of foreign currency due to the new US sanctions.
Pointing to the growing number of Iranians falling below the poverty line, the MRC estimates that at least 23% of the population was below the poverty line when the last fiscal ended (March 20). A year earlier 16% of the people were below the poverty threshold.
The rising numbers of poor people demands that the government adopt appropriate welfare policies to help improve the quality of life of vulnerable groups.
It recalled that the government adopted the current subsidized currency plan for importing essential goods last spring. There is wide gap between currency rates in the open market and subsidized rates mandated by the CBI. One subsidized USD costs 42,000 rials while the green back fetches about 150,000 rials in the open market.
MRC says the subsidized currency allocation has not only fallen short of expectations, but has created the conditions for rent-seeking and corruption.
As one of the ramifications of the policy, it pointed to the rising volume of imported essential goods in the last fiscal compared to a year ago.
“Inequality of the distribution of basic goods across different income deciles of the society is another drawback of the failed policy.”
Each Iranian in the tenth decile on average receives 730,000 rials in subsidized goods on a monthly basis, while the share of the poor in the first decile is a meager 180,000 rials.
This is largely because those in higher deciles generally consume more compared to people at the lower end of the economic ladder.
To address the chronic problem, MRC proposed that the government scrap the subsidized currency policy in its entirety, and instead, implement alternative policies to support the vulnerable using the allocated resources ($14 billion) in this year’s budget.
Cash and Kind
Among the existing subsidy regimes, MRC prefers paying cash subsidies, arguing that compared to other options, cash subsidy is less susceptible to corruption because money is paid directly to end consumers.
In order to address policymakers’ concerns over meeting for nutritional needs of households, however, it takes a middle ground and proposes a cash and good program.
Elaborating on the policy, the center says the subsidy should be paid to the first seven deciles in the form of goods within three months. Cash equivalent to the value of the subsidized goods be deposited into consumers bank accounts and consumers buy their assigned quota from distribution centers using their debit card.
If consumers don’t use their quota after the deadline, they should be allowed to withdraw cash equivalent to the price of the quota.
It sets some preconditions to help make the cash payment policy efficient. One is that the payments should not be permanent, and if the payment is for a limited period, the beneficiaries should be informed in advance.
Also, subsidies should not be paid as per regular time intervals and amounts should not be known to the people because it eventually leads to false illusions of a permanent income.
According to available data, out of $14 billion paid in subsidies for importing essential goods, $3 billion was for pharmaceuticals and $8.3 billion for consumable goods, namely food.
MRC propose that government allow traders to import essential goods at Nima rates (Integrated Forex Deal System) and pay the difference of Nima rate and subsidized rates in rial to consumers.
Nima is platform where exporters sell their currency earnings to importers of non-essential goods. Forex rates at Nima are lower than the open market rates and higher than subsidized rates.
It merits mention that in the current budget, the Majlis has made it mandatory for the government to revise its subsidized currency policy for importing essential goods.
Accordingly, the government is obliged to allocate $14 billion from oil export revenue for importing essential goods. Funds should be allocated for import of essential goods, pharmaceuticals, medical equipment and grains.
Foreign currency should be earmarked for importing goods either at subsidized rates or Nima rates. In the case of the latter, the difference in Nima and subsidized rates should be paid either in electronic coupon or directly in cash.
