The removal of subsidies and the distribution of part of its freed-up resources among a small group of people is a hackneyed story that is retold under a new name each time.
Under the shadow of current inflationary pressures, any subsidy based on the distribution of cheap goods turns into a huge burden on the government budget after a few years and requires a new plan. This was stated by Davoud Souri, an economist, in an article for the Persian economic daily Donya-e-Eqtesad. A translation of the text follows:
On April 22, 2018, a couple of days after the introduction of subsidized foreign currency, I wrote in an article titled “Let’s Get Back to the Rationality of Economics”: “Logically, governments need to avoid policies that might later require snap decisions that cause anxiety among people.”
It is patently clear that subsidizing imports was a cataclysmic policy; its rollback, however, is not because of the return to economic prudence but thanks to the country reaching the boiling point of forex crisis and corruption.
The subsidy rollback policy has been touted as “economic surgery”, but the scalpel has been pointed toward people’s livelihoods. This is the livelihood of people that is waning and moribund, not the economy whose navigators are the administration and the financial system.
The removal of subsidies and the distribution of part of its resources among a small group of people is a hackneyed story that id retold under a new name each time.
Under the shadow of current inflationary condition, any subsidy based on the distribution of cheap goods turns into a huge burden on the government budget after a few years and requires a new plan to reduce or eliminate a group of subsidy recipients; any cash subsidy quickly loses its value and buying power. This is a recurring process that cannot be controlled, except by curbing inflation and improving the efficiency of government spending and executive policies.
Subsidizing imports was a cataclysmic policy; its rollback, however, is not because of the return to economic prudence but thanks to the country reaching the boiling point of forex crisis and corruption
Economic surgery and the return to the rationality of economics will be welcome only when you find that policymakers have a precise knowledge of the root of problems. If the government keeps blaming kingpins and dealers for price increases and tries to control prices by issuing directives, you need to know that it is nothing more than theatrics.
Who doesn’t know that the root of inflation and rising prices is in the government’s budget deficit? People are paying for each rial of government overspending. Has this scalpel also touched the government’s spending preferences?
Banking imbalances and overdrafts from the Central Bank of Iran are also the cause of inflation. What is the role of the government here? Is the central bank the only culprit? Has the government’s access to banking resources been stopped? Has regulatory control of interest rates changed less than half the rate of inflation? Did you know that the risk-free interest rate paid by the government and fixed-income funds is higher than the bank interest rate and we still speak of bank imbalances and ask them to engage in long-term housing and production financing?
Besides the rising inflation rate, we are inventing new taxes and taxation tools. The first public reaction to this policy would be to flee from official banks.
Iranian policymakers should ponder over fundamental issues and seek to find the cause of the crises instead of dealing with its effects. For example, in the case of subsidized import policy and subsidized energy, it is the depreciation of local exchange rate that makes the burden of subsidies heavier.
The exchange rate is a nightmare for our governments because it reveals their performance compared with that of their counterparts in other countries. The exchange rate — the value of local currency — summarizes the performance of one economy against another. By following the ups and downs of this figure over time, one can learn about the quality of policymaking.
It is the nightmare of our governments because they cannot control it, as one end of it is in the hands of competitors. They can show their performance and compare it to 50 years ago but people compare their economic well-being with that of their counterparts in other countries, not with that of their fathers.
Government officials might be able to hide their inefficiencies by selling oil and injecting foreign currency earnings, but for how long and at what price? They have a misunderstanding that oil market developments and access to oil revenues determine a currency’s value. However, they are unaware that oil is only a short-term drug and an opportunity to strengthen the country’s economy.
Is there a way to stabilize the exchange rate other than by increasing foreign exchange earnings? Is there a way to increase foreign exchange earnings other than by supplying goods and services to international markets? Can goods or services be offered to global markets without having interaction with them and complying with their standards and laws?
The answer to all the above questions is “no” and one of the factors affecting the exchange rate is the removal of barriers to having interactions with international markets and compliance with their standards and rules. However, there is no mention of this in the so-called economic surgery.
