After several years of implementing Iran’s fixed-rate foreign exchange subsidy, a widening gap has emerged between the preferential and market exchange rates, reigniting concerns about fiscal pressure and economic inefficiency. Recent data show the free-market rate has surged to around IRR 1,090,000 per USD, nearly IRR 800,000 higher than the official subsidized rate. Economists warn that the growing spread mirrors the distortions seen during the final year of the former 42,000-rial currency policy, when fiscal burdens and rent-seeking behavior escalated sharply.
Experts argue that maintaining a fixed-rate subsidy has become increasingly ineffective under such market conditions. The widening gap acts as a “policy Achilles’ heel,” intensifying both financial and economic side effects. They recommend linking the subsidized rate to a percentage of either the free-market or commercial exchange rate, to prevent further divergence and reduce speculative incentives.
Limited Impact on Consumers
The original goal of subsidized foreign exchange was to stabilize the prices of essential goods by lowering input costs for producers and importers, thereby easing inflationary pressure on households. However, official studies indicate that the benefits of cheap forex have barely reached consumers. According to a report by the Plan and Budget Organization, only about 30% of the subsidy’s impact reached end-users, while the remaining 70% accrued to importers and intermediaries.
This imbalance has encouraged rent-seeking and expanded the supply chain for essential goods. As more intermediaries enter the system to capture currency-related profits, consumers lose access to the intended benefits. The inefficiency also raises fiscal costs: roughly $9 billion in preferential forex has been allocated for essential goods and medicines since the beginning of the current fiscal year (March 2025), yet food and beverage prices surged 65% in October compared to the same month last year.
Economic analysts emphasize that continuing the current fixed-rate allocation will not curb inflation or improve household welfare. Instead, they suggest a gradual reduction in the number of subsidized items, paired with targeted support through digital vouchers or cash equivalents directed at the lowest-income households (deciles 1–3).
Such a targeted approach would make fiscal support more effective while reducing the government’s mounting subsidy burden. Linking forex subsidies to market realities—rather than maintaining rigid, politically set rates—could also mitigate corruption, encourage transparency in imports, and foster a more sustainable price environment.
As the exchange gap widens and inflationary pressures persist, Iran faces a pivotal policy choice: either reform its subsidy mechanism toward market alignment or risk deepening fiscal imbalances that undermine both growth and equity.
