Subsidized Foreign Currency: Bane of Pharma Industry

EghtesadOnline: The Iranian government’s policy of granting subsidized foreign currency at the rate of 42,000 rials per US dollar to import pharmaceuticals and medical equipment is distorting the economic process and its furtherance will prove counterproductive, as it will impede the development of the industry.

News ID: ۷۴۸۰۳۵

31 July 2019

This was stated by the senior members of Health Economy Commission of Tehran Chamber of Commerce, Industries, Mines and Agriculture in a recent meeting to discuss the private sector’s opposition to the government’s subsidy policy.

“Since the beginning of the current Iranian year (March 21), the government has spent $1.1 billion on the import of pharmaceuticals, their raw materials and medical equipment,” Chairman of TCCIM’s Health Economy Commission Mahmoud Najafi-Arab cited government officials as saying.

“Other expenses related to pharmaceutical industry such as imports of dietary supplements and medical devices should be covered through the export earnings of non-oil products traded on Nima, the so-called secondary FX market. The industry’s total annual expenses incurred in foreign currencies, either at the rate of 42,000 rials or Nima, are about $4 billion,” Financial Tribune quoted him as saying.

The official stressed that the private sector has continually voiced strong opposition to the subsidy scheme on solid grounds.

“First and foremost, not all components and drug product containers are subject to subsidized currency. To import machinery or packaging materials, producers need to spend dollars at exchange rates other than 42,000 rials. As a result, the end price of the drug is higher than the price set by the government using the subsidized currency as a benchmark. Subsidized dollars only cover less than 30% of the costs of drug production,” he said.

Rent-Seeking Practices

Najafi-Arab noted that the subsidized currency policy has given way to rent-seeking practices in Iran’s business environment, which has in turn led to the broadening mandate of oversight bodies and consequently a more labored economic system.

“The outbound smuggling of pharmaceuticals and medical equipment is another corollary of the cheap dollar. For example, the subsidized import of insulin pen, in its entirety, is economically more profitable than producing it domestically. That’s why the private sector believes the Plan and Budget Organization should allocate subsidies to strengthen healthcare insurance rather than spending it on imports,” he said.

Najafi-Arab also pointed out that pharmaceutical and medical equipment industries’ difficulties have been compounded by the Health Ministry’s failure to uphold the so-called Sustained Improvement of Business Environment Act of 2011-12, which requires all ministries to consult the private sector in drafting or reviewing bylaws and administrative procedures related to business.

Nasser Riahi, a member of TCCIM’s Presiding Board, who also leads the Iranian Pharmaceutical Importers Association, believes that problems associated with the transfer of subsidized currency due to sanctions should be added to the list of the government’s controversial policy.

“The private sector wants to get rid of government’s oil money from its system to provide the foreign currency it needs via other channels, such as non-oil export revenues. On top of that, there’s a lot of competition among importers for getting subsidized dollars as pharmaceuticals and medical equipment are not on the list of US sanctions and this has intensified supervision and control of oversight bodies and prolonged the process of receiving government money,” he said.

A Counter-Development/Production Policy

The TCCIM official noted that misguided policies, actions and constant changes of guidelines have undermined the trust of foreign providers, as Iranian orders have to be paid for in advance and completely.

“The current policy is in effect granting subsidies to imports instead of production. Except for imports of a fraction of raw materials subject to subsidized currency, the pharmaceutical and medical equipment production sector has to provide the foreign currency it needs at the open market exchange rate. But for importers of complete drugs, all costs are subsidized,” he said.

Riahi stressed that the extension of import subsidy has turned out to be a counter-development policy.

“This year’s value of pharmaceutical market, according to the official estimate, hovers around 240 trillion rials, which is smaller than that of the macaroni industry,” he said.

Haleh Hamedifar, CEO of high-tech company, CinnaGen Pharmaceutical Group, said knowledge-based industries are the least likely pharmaceutical production sector to receive government subsidies since they produce all their ingredients, including raw materials.

“The more an industry moves toward indigenization of technology and self-sufficiency, the least it is likely to receive subsidized currency. Also, it seems that imported goods cannot obtain clearance permits at customs terminals due to missing or incomplete bank documents related to the transfer of currency. The pileup of commodities at customs has in effect reached a significant level ever since the introduction of currency subsidies,” she said.

Hamedifar noted that under the circumstances, all importers who receive subsidized currency are presumed guilty of corruption until proven innocent.

“Producers of pharmaceuticals, high-tech industries in particular, have to spend a great deal of time proving their integrity,” she declared.