Contrary to expectations, the Iranian Parliament opposed the double-urgency motion bill on the revocation of subsidized foreign currency for importing essential goods, adding it to the parliament’s future schedule.
This comes as some parliamentarians had talked of unanimity over the termination of the government’s allocation of subsidized forex for importing essential goods and pharmaceuticals, the Persian daily Etemad reported.
Earlier this month, the chairman of Majlis Economic Commission had said the distribution of cheap forex only leads to corruption and rent-seeking practices, underscoring the importance of making a decision in this regard.
Lawmakers who oppose the cessation of payments of cheap subsidies to importers at the rate of 42,000 rials per US dollar believe that with an inflation rate of above 45% and prices of some pharmaceuticals going through the roof, the move would inflict yet another shock to the economy.
The question is how impactful cheap forex has been on the stability of the prices of essential goods?
According to the Statistical Center of Iran, the inflation rate increased from 8.2% in the year ending March 2018 to 45.4% in the month ending Oct. 22, 2021.
The annualized inflation rate of food and beverages jumped from 12.3% to 61.4% during the period under review. The inflation rate of health and treatment services increased from 7.2% in the fiscal 2017-18 to 40.4% in the current year.
A significant deviation from the objectives of the allocation of subsidized forex is observed when you compare these figures, which cannot be blamed entirely on sanctions. The government’s cumbersome bureaucratic procedures and extensive rent-seeking activities are partly to blame.
An example can be found in the 2018-19 annual monitoring report of the Supreme Audit Court of Iran, the supervisory arm of the Iranian Parliament, saying up to $4.8 billion worth of government subsidies on imports were unaccounted for.
Controversies around subsidized forex will not only remain unresolved but also reemerge when the parliament starts weighing the bill according to its scheduled timeline.
Lack of a detailed plan for solving the long-pending economic issues is one of the major characteristics of the new administration over the first 100-odd days since its inauguration.
When the parliament voiced its opposition to the double-urgency plan on terminating subsidized imports, controversies entered a new phase. Not long ago, nearly all experts close to the government and representatives supported the plan on the elimination of subsidized forex. There were even news of the government’s plan for a gradual, cautious removal of this type of subsidies while some lawmakers urged the government to go cold turkey.
But on Sunday, suddenly the parliament decided to take time to further probe this issue, suggesting that the parliament is still reluctant about the removal of forex subsidies despite the government’s economic hardship.
Of course, some legislators have time and again stressed the insignificant effect of forex subsidies on the livelihoods of Iranian households. But none of the branches of the government is capable of making a decision in this regard.
The Budget Law of 2021-22 allocated $9-10 billion to the subsidized import of essential goods and pharmaceuticals, following which the Central Bank of Iran provided $9.5 billion to importers of these items by Sept. 22, of which $400 million have been spent on importing vaccines.
However, given the economic climate of the country, it is clear that the allocation of subsidized forex would continue by the end of the current fiscal year (March 20, 2022).
The government set the fixed foreign exchange rate of 42,000 rials per US dollar in April 2018. Imports of 27 groups of goods were subject to the government’s subsidies then but at present, only four to five groups of goods are still eligible for subsidized forex.
Impact of Prices
What needs special attention is the impact of such a subsidy on the prices of goods and services.
The Statistical Center of Iran reported that since March 21, 2018, up until now, the annualized inflation rate has fluctuated greatly: It began an upward trend from 8% in the month ending April 20, 2018, to 42% in the month ending Oct. 22, 2019. It then entered a declining stage such that it dropped to 26% in the month ending Aug. 21, 2020, but again rebounded in the current year to the unprecedented rate of 45.4% in the month ending Oct. 22.
Some experts don’t approve of the discontinuation of subsidized forex under the current difficult economic circumstances. They believe that despite the costly expenditure of allocating subsidized forex, particularly for low-income individuals, its removal is bound to result in a sudden increase in the prices of essential goods and pharmaceuticals and far more people will be hit.
Forty-two months into the introduction of subsidized forex, the deviation from the objective of the policy as a tranquilizer to cushion the first blows shooting out from the depreciating rial to low-income individuals is starkly clear from the inflation statistics on different subcategories like health and treatment, and food items.
The distribution of rent among favored groups and the rise in corruption and sales of goods at market rates were the main outcomes of the subsidized forex policy. Had the policy been implemented in the right spirit, it could have alleviated economic pressure on low-income households. But sadly, this policy has only pushed more people into poverty.
Contributing Factors to High Inflation
As per the Ministry of Cooperatives, Labor and Social Welfare’s report titled “Poverty Monitor in Fiscal 2020-21”, the inflation rate of foods and beverages neared 90% in the month ending April 20, 2019, shortly before the end of the US waiver period for Iran’s oil customers.
By Feb. 19, 2020, the inflationary effects of sanctions almost disappeared and the inflation rate of these items declined to 20-30%. But the outbreak of Covid-19 hurt Iran’s economy even harder.
The ministry believes that the main reasons of the rise in the prices of essential goods and pharmaceuticals before the outbreak of the pandemic were the decline in oil exports and the depreciation of local currency.
Price rises after the outbreak of the disease were to blame on other conditions, including the fall in the prices of oil and foreign resources and the recession that emerged from low demand due to Covid-19 restrictions on economic activities in the fiscal 2020-21.
The whole thing accelerated the growth of year-on-year inflation rate, such that the year-on-year inflation rate stood at 47% in the fiscal 2020-21; the YOY inflation of food and non-food groups also stood at 67% and 40.5%, respectively.
The high inflation rate of food and beverages forces people in low-income deciles to spend the lion’s share of their income on the items included in this group and as a result widens the wealth gap.
Before the reimposition of sanctions, the ministry’s report says, 22% of people were living in absolute poverty in the year ending March 2018. In the following two years, the ratio of people living in poverty increased to 26% and 32%. In other words, 24 months since the introduction of the subsidized forex policy for importing essential goods, the percentage of people living below poverty line has increased by 10%.
