Gov’t to End Subsides for Medicine Import

“Allocating subsidized currency creates the ground for rent-seeking and corruption and we are determined to end this by end of the fiscal year [March 2020]” Bahram Aynollahi said in a talk with IRIB news.

Over the past three years the former government allocated billions in subsidies for importing food and medicine selling the dollar for 42,000 rials. The rate was almost a seventh of its value in the open market. Fraud and misappropriation during the years were rampant as some big importers and vested interests took the cheap currency but their imports were close to zero.

Cheap currency is sourced largely from oil export and is used only for importing essential goods, pharmaceuticals and machinery. The subsidy policy was designed to avoid price hikes in food and raw materials and protect consumers against inflation and price gouging almost always blamed on high forex rates.

The policy has been strongly condemned by economists and social scientists for its susceptibility to rent-seeking and corruption because of the huge difference between the subsidized currency rates and the open market.

In the 2021-22 budget the controversial subsidy policy has been envisioned to continue for six months to Sept. 21.

Despite the obligation to scrap the subsidies this week, the minister said it will continue until the yearend.

To support the low-income strata and help mitigate the impact of potential higher prices when the subsidies end, Aynollahi said the government plans to allow currency for medical import at market rates and pay the difference (between the subsidized and open market forex rates) to medical insurance companies.

“The price difference will be paid to the people via insurance firms.  This will help consumers to directly benefit from the subsidies,” he was quoted as saying. No details were available.

The Rouhani administration had been under pressure to scrap the failed policy, which was originally aimed to support low income households and control inflation of basic goods. The goal was never achieved as prices skyrocketed and the government apparently for political reasons was unable or unwilling to do away with the policy.

The people, economists and market analysts have largely blamed the subsidy distribution system and the absence of strong government oversight for the unacceptable state of affairs. It is always and rightly said that the people buy food and other essentials at open market rates, despite the fact that the same goods are imported at highly subsidized rates.

Subsidizing currency in its current format was given after the steep rise in forex rates in the spring of 2018 when the government pegged the subsidized dollar at 42,000 rials and cut short the list of goods eligible for cheap currency to barely a few essential items.