Iran Parliament’s Think Tank: Forex Subsidy Policy Impractical

EghtesadOnline: The Majlis Research Center, the parliament’s research arm, has taken a dim view of the preferential forex rate policy of the government in the past months and warned about the perpetuation of failed tried and tested policies in the coming year as seen in the proposed 2019-20 budget bill.

News ID: ۷۴۶۴۱۱

02 January 2019

It refers to the allocation of $14 billion from oil export revenue mentioned in the proposed budget to import essential goods at the heavily subsidized rate of 42,000 rials to the USD.

Following volatility in the forex market that sent the rial to unprecedented lows, the government decided to unify the US dollar rate in April. This created a wider gap between rates in the open market and the prescribed rates mandated by the Central Bank of Iran.

The USD is currently sold at around 110,000 rials in the open market, having soared to 190,000 rials at the end of summer, Financial Tribune reported.

After the controversial forex rate unification policy failed to produce the desired results, the government was forced to cut the list of goods eligible for subsidized currency. The CBI shortened the list to barely 25 basic items.

Soon after, the regulator decided to launch another mechanism, named as Integrated Forex Deals System (locally known as Nima), to help facilitate export and import and let forex rates be quoted to rates closer to the market.

Reflecting on the budget bill, the MRC recalled that the government would earn 42,000 rials for each dollar allocated for importing essential goods, instead of 80,000 rials currently exchanged on the Nima. In short, “the implementation of this policy means foregoing an estimated 530 trillion rials ($4.9 billion)”.

The think tank acknowledges the need for supportive measures for vulnerable groups, but at the same time casts doubt on the success of policies aimed at keeping the market well supplied with essential goods at reasonable prices.

It notes that the policy did not have any positive effect on the price of many essential goods in the past (as is evident in the galloping inflation). At  the end of the day “the price consumers pay is the same as when goods are imported at open market rates, or at best, the Nima rate.”

Failed Policy

Allocating subsidized forex for importing essential goods results marginal profit, which, the report argues, goes into the pockets of importers and those involved in the complex distribution network.

The MRC said perpetuation of the forex policy is tantamount to “wasting government resources without any benefit to the people.”

However, MRC admits that the government has had success in controlling the distribution of a handful of staples such as flour and pharmaceuticals as there is a “robust supervisory infrastructure for the distribution of such goods.

It adds that if the government is adamant on implementing preferential forex allocation policy no matter the cost, it should at the least revisit the volume of allocated forex and limit it to critical imports.

“[The government] should identify items that have  official rates, were sold to consumers at that price and subsequently allocate subsidized currency to those goods.”

MRC concludes that implementing preferential forex polices for controlling prices has failed and consumers inevitably buy goods at prices much higher than what the government says or expects.

“The prices of meat, beef and eggs, for which preferential forex has been allocated, have risen dramatically in recent months,” the powerful research center warned.

Taking the Blame

It blames the failure of preferential forex policy on four main sources: importers, producers, the distribution network and consumers.

Importers of raw material and intermediary goods required to produce a particular good may simply not import the goods for which they received the preferential forex, the MRC said. “They may also overstate the value of imported goods to the customs administration or declare another item instead of an item for which they received the cheap currency.”

Additionally, the producers who import raw material for their manufacturing units can choose to export it at higher rates. They may also hoard the imported material, intended originally for producing essential goods, to manufacture other non-essential items. Interestingly enough, they could also sell that product to other producers at open market rates.

“Sometimes the fault is with the distribution chain in that the networks that distribute cheap goods may export them at higher rates or hoard it to sell at higher open market rates.”

MRC illustrates that even if the government's preferential forex passes importers, producers, and distributors’ filters, there is the fear that the final buyers may hoard the goods in their warehouses or even export them.

“These opportunists wait for the time when people wait in long queues for buying subsidized goods and then offer the hoarded goods at open market rates.”