Subsidized Forex Policy Dysfunctional

EghtesadOnline: Governor of the Central Bank of Iran says the subsidized foreign currency programs for importing essential goods has failed to achieve the desired results due mainly to the dysfunctional distribution systems.

News ID: ۷۴۶۸۸۲

10 March 2019

In an Instagram post late Friday, Abdolnaser Hemmati admitted that because of shortcomings in the forex distribution network and oversight weakness the policy has failed to curb rising prices of most essential goods in the midterm.

“Despite the initial positive effects of subsidized currency on controlling [price] shocks on the supply side, the faults with the distribution system gradually came to the fore,” he wrote.

Pointing to rent-seeking loopholes plaguing the forex policy, Hemmati regretted that in most cases the subsidies had gone to avaricious middlemen instead of the intended consumers, according to Financial Tribune.

The issue of supplying essential goods and pharmaceuticals is one of the pivotal concerns of the CBI and government as the new sanctions particularly hit those at the lower end of the economic ladder, he wrote.

Hemmati reiterated that the CBI is steadfast in resolving the subsidy issue and the government has put the issue high on its agenda. “A right decision will be made soon.”

The issue was underscored earlier by President Hassan Rouhani who called for stringent supervisory mechanisms and rewriting subsidized currency allocation.

$14 Billion Ceiling

“The government allocated $14 billion for importing essential goods, but it is unfortunate that a large part of imported goods did not reach the people at subsidized price,” he said during a visit to Gilan Province earlier in the week.

During Majlis debates over next year’s (March 219-20) budget bill, lawmakers approved $14 billion from oil export earnings for importing essential goods, pharmaceuticals and raw material for manufacturers.

The government must allocate currency for importing goods either at subsidized rates or Nima rates. In the case of the latter, the difference in Nima and subsidized rates should be paid either in electronic coupon or directly in cash to the people.

Subsidized currency (1 USD=42,000 rials) is cheaper than rates quoted on Nima (integrated forex deals system) where the greenback now is offered at 90,000 rials. Forex at Nima rates is provided for import of non-essential goods.

The head of Plan and Budget Organization Mohammad Baqer Nowbakhat said earlier that the government is weighing options proposed by the Majlis as to how best to use subsidies in the interest of the common people and fixed-wage earners.

According to Nowbakht, the government can continue the existing procedure but tighten supervision mechanisms. Within the current procedure, foreign exchange at subsidized rates will be given only for importing essential goods.

As for other options, Nowbakht said forex at Nima rates could be allocated for all essential goods and the difference between subsidized rate and Nima rate be given to the people via electronic coupon.

Paying the difference between the two currency rates to the people in cash is another alternative available for the government, he said.

The Majlis Research Center, the parliament’s research arm, had earlier warned about the perpetuation of failed subsidized forex policies as was enforced in the current fiscal that ends on March 20.

The think tank argued that there is no merit in implementing a subsidized forex policy for imports “if  end consumers pay the same price as when the goods are imported at open market rates, or, at best, the Nima rate.”