Subsidized Forex Maintained in Iran's 2020-21 Budget

EghtesadOnline: Despite persistent calls by economic experts and academia on the government to scrap subsidized currency allocations, it appears that the controversial forex policy to pay for importing basic goods, will be sustained in next year’s budget (March 2020-21).

News ID: ۷۴۹۰۶۱

30 November 2019

Mohamadbaqer Nowbakhat, head of the Plan and Budget Organization, made the announcement Thursday in a talk with the parliamentary news website, ICANA.

Successive governments have allocated cheap foreign currency for importing essential goods for decades to avoid drastic price hikes in food and raw materials used by manufactures.

Under the present government the greenback is sold for 42,000 rials only to import selected and essential goods. This is while the dollar exchange rate in the open market is three-fold at about 124,000 rials, according to Financial Tribune.

“The parity rate will remain at 42,000 rials [for 1 USD] in the next budget bill” Nowbakhat said, reiterating that the government has no plan to increase the currency rates for budgeting needs.

Subsidized currency was earmarked following steep rise in forex rates in the spring of 2018 when the government “ordered” the rates and shortened the list of goods eligible for subsidized currency to a few essential goods, including food, raw material and pharmaceuticals.

Asked how decisive the government is in perpetuating the much-debated subsidized currency policy, Nowbakhat said “This is our final decision”.

Using cheap currency for importing basic goods has drawn criticism from more quarters than one because the relevant procedures is full of holes and has failed to deliver.

The policy is often blamed for wasting scarce forex reserves and public money in the interest of avaricious traders, middlemen and the army of rent-seekers.

Opponents find the faults with the distribution system and absence of efficient government oversight, which results in real consumers of essential goods to ultimately buy goods at open market rates despite the fact that those goods have been imported at highly subsidized forex rates.

The government has so far ignored strong criticism leveled against is currency policy and procedure and insists that it has helped keep prices of essential goods in check and in the interest of fixed-wage earners and those at the lower end of the economic ladder.

No 2 Ways

Regarding the likelihood of the government taking a “moderate approach” and using currency rates quoted in the secondary market, Nowbakhat said any change in the forex rates would lead to dramatic rise in prices of most essential goods.

“If we use Nima, instead of subsidized currency, then we will have accepted that the price of say chicken and sugar are sourced by a USD costing 110,000 rials… and we will see prices soaring again” Nowbakhat said, reiterating the government’s efforts to curb inflation and price rises under the tough economic conditions.

The secondary market, also known as Nima, was created by the Central Bank of Iran in summer 2018 to be used as a venue where companies sell export earnings at rates lower than the open market. The currencies sold on Nima are purchased for imports.

Via the Nima system importers declare their currency needs, exporters register their currency proceeds and banks and authorized moneychangers act as dealers.

The PBO chief rejected the possibility that the government may use other substitute methods, such as electronic coupons, as proposed by the Majlis.

Nowbakhat argued that the subsidized forex allocation has become a routine and ingrained procedure, dismissing the need for any change.

“Despite using subsidized currency prices soared at some point in the past, but now this has become a dominant procedure”.

Spurred by mounting criticism, the parliament in February rejected the forex policy as is currently implemented. When debating the 2019-20 budget, lawmakers made it mandatory for the government to revise its inefficient subsidy policy.

The Majlis proposed that the government allocate $14 billion in subsidized currency in the form of "electronic coupons” for essential goods, pharmaceuticals and medical equipment.