Economy, Domestic Economy

Call for Major Overhaul of Subsidy, Import Policies

Call for Major Overhaul of Subsidy, Import Policies
Call for Major Overhaul of Subsidy, Import Policies

Member of parliament and chairman of the Budget and Planning Committee, Gholamreza Mesbahi Moghadam, has proposed restricting government cash subsidies “only to those at the bottom” of the economic ladder, and excluding the high-income brackets.

Noting that the government pays as much as 400 to 420 trillion rial ($14.8b-$15.6b) annually in cash subsidies, Mesbahi Moghadam told a banking conference last week that the government could save almost $9 billion by dropping the cash subsidies to high-income groups and “subsidizing only the four lowest deciles.”

“The saved amounts could then be used to subsidize the production sector, help check inflation and create jobs,” ISNA quoted him as saying.

The controversial and costly cash subsidy scheme is a part of the ‘subsidy reform plan’, passed under former president Mahmoud Ahmadinejad. The scheme removed subsidies on some basic goods and energy and instead paid cash to all Iranian households. In the second phase of subsidy reform plan, which began after President Hassan Rouhani took office, top income earners were urged not to apply for the cash handout so that the government could use the money to address major economic problems.

Yet, it was officially reported that out of Iran’s 77 million population, 73.6 million had registered to receive the cash subsidy (about $13 at market exchange rate) in the second phase. The proposed budget bill for the next fiscal year (starting March, 2015) also has made provisions for 420 trillion rials ($15.6b) towards this end, indicating that the government is unwilling or unable to take firm action to identify the top earners to exclude them from the subsidy list.

In addition to the oft mentioned dispute over the whole cash subsidy program, the senior lawmaker criticized the huge volume of nonessential goods imported into Iran “in spite of limited foreign exchange resources,” for which he blamed poor management and lack of effective oversight.

According to Mesbahi Moghadam almost 85 percent of Iran’s $47 billion imports since the beginning of the current fiscal year (March 2014) comprised of capital, basic and intermediate commodities while the remaining 15 percent were final products. “This is while a major part of the intermediate and final commodities could be produced domestically,” he asserted.

 Stringent Regulations

As another example of unregulated and unwanted imports, he pointed to the huge number of luxury cars imported by Iranians since early this year at an estimated total cost of $2 billion. Calling for more stringent regulations by the ministry of Industry, mine and trade “than just doubling the custom tariffs on imported vehicles” he said it would make a lot of sense to import budget cars, thereby “creating competition in Iran’s auto manufacturing sector.”

Iran’s state-owned/affiliated auto companies have for years come under mounting criticism for the poor quality and rising costs of their products. In recent months senior government officials have openly singled out the highly inefficient and lethargic automakers and called for an overhaul of the gas-guzzling industry.

The list of non-essential commodities imported by Iran is not limited to luxury sedans and SUVs. According to a report published by the chamber of commerce, Iranians imported $58,000 worth of safety pins from China and UAE, $71,000 worth of camels from Pakistan, $670,000 chewing gum from Turkey and UAE, $27,000 worth of pebbles from China, and $1.8 billion worth of race horses from Germany, Bulgaria, Turkey and UAE in the past 10 months. According to the chamber while Iran’s export has grown by 7 percent compared to the same period last year, imports jumped by a massive 24 percent.

Mesbahi Moghadam further told the conferees to help overcome limitations caused by sanctions imposed by the UN Security Council on the key banking sector. He suggested a policy by which exporters would be obliged to sign an agreement with the government to sell the foreign currency earnings from exports to state  banks at an agreed exchange rate. He recalled  that a similar “policy was first adopted by the government during the Iran-Iraq war (1980-88) to generate foreign currency from non-oil exports due to the decline in oil exports.”

Another suggestion by the MP was implementation of a barter trading scheme by which Iran’s goods and services are exchanged for goods/services from other countries. Iran has barter trade deals with some countries including China, India and Pakistan. In exchange for oil exports to China and India, Iran receives metal products wheat, soybean meal and other consumer goods.

He also proposed that requests for foreign currency should be managed solely by the Central Bank of Iran to avoid reliance on foreign banks. Noting that Iran exports goods to more than 160 countries, Mesbahi Moghadam said the CBI should allocate forex from exports to importers of essential goods and machinery.

In relation to some strange data, the lawmaker said “Iranian households hold something between $18b to 22b in their homes”.  He proposed workable policies by the government to attract the people’s foreign currencies in bank accounts. Lamenting that people’s confidence in banks was lost during the previous governments when the banks paid the rial equivalent of foreign currencies to people holding forex accounts and that too at the much lower official exchange rate, he said the government must strive to regain the people’s trust and put the huge amounts of hard currency to better use.