Subsidized Forex Policy Under the Microscope

EghtesadOnline: The High Council of the Economic Coordination will convenes on Thursday to decide the fate of the highly controversial subsidized forex policy for importing essential goods, said an official associated with the council.

News ID: ۷۴۷۶۲۰

19 June 2019

The council is an ad-hoc decision-making body set up at the behest of the Leader Ayatollah Seyyed Ali Khamenei to address major economic issues.

Amir Bagheri said the government faces two options  with regard to the forex subsidies and President Hassan Rouhani is due to make the final decision on Thursday, according to Financial Tribune.

The first supports the perpetuation of the existing subsidized forex policy, albeit, with some tweaks. “In this setup currency will be allocated only for importing limited [essential] goods,” IRNA quoted him as saying.

The second proposal involves getting rid of subsidized forex policy in its entirety, Bagheri said, adding that this option does not seem to have much traction.

“The first option is closer to the president’s views,” he said without elaboration.

In recent times there has been increasing criticism of the government’s controversial policy of subsidizing billions in foreign currency given to merchants for importing food and other basic goods.

Harm, Not Help

The rising volume of imported essential goods using cheap currency, chaos in the distribution of basic goods among the people and the potential for rent-seeking and corruption has often been mentioned by economists and observers as some of the harmful results of the government’s policy to subsidize currency.

Of course this plight and policy has existed for decades and is not attributed only to the Rouhani administration. What is worthy of notice is that in recent years forex resources have been of the descending order due largely to the hostile US economic sanctions.

Among other things, chaos in the distribution of basic foods, the potential for rent-seeking and corruption, and inability of the state to effectively support the deprived masses is often referred to by economists and observers as some of the abject failures of the government’s ill-fated subsidized forex policy.

The mounting criticism convinced parliament in February to reject the forex policy as is currently being implemented. Lawmakers made it mandatory for the government to revise its inefficient and dysfunctional subsidized currency policy in the current fiscal that started in March.

According to available data, out of $14 billion paid in subsidies for importing essential goods last fiscal (March 2018-20) $3 billion was for pharmaceuticals and $8.3 billion for consumable goods, namely food.

The flawed policy lacking transparency has often been blamed for wasting scarce forex reserves and public money to the benefit of avaricious traders, middlemen and rent-seekers

Commenting on the issue, Mohammadreza Pourebrahimi, a member of the Majlis Economic Commission criticized the likelihood of the government decision to retain the subsidized forex policy.

“The government insistence on continuing this policy demands reflection,” he told Fars News Agency.

Direct Payments

He says allocating subsidized forex for importing essential goods has not had any significant (positive) impact on the people’s livelihood.

“I believe that the best solution is to pay the difference between the subsidized rates and Nima (Integrated Forex Deals System) rate directly to the people,” he was quoted as saying.

Nima is the platform where exporters sell their currency earnings to companies wanting to import non-essential goods. Nima currency rates are lower than in the open market but higher than the subsidized rates.

A subsidized US dollar costs 42,000 rials. This is while it sells for 100,000 rials in Nima and 135,000 rials in the open market.

“The main issue of concern here is to let people have a share of [cheap] foreign currency resources. People would benefit if foreign currency are distributed properly,” the lawmaker from Kerman was quoted as saying.

Asked whether the proposal he is backing wouldn’t give rise to the prices of essential goods, he said, “No, it won’t have any negative effect on the economy because the process is transparent from scratch.”

Of the $14 billion subsidized forex given for importing essential goods in the last fiscal, the fate of $3.5 billion remains unclear, the MP has said in the recent past.

The Majlis Research Center in its latest report proposed that the government pay the subsidies either in cash or kind to selected groups and low income deciles.

It argued that compared to other options, paying the  subsidy in cash is less susceptible to corruption because money would be paid directly to those at the lower end of the economic ladder.