Iran Gov’t to Continue Supply of Subsidized Essential Goods

EghtesadOnline: The government plans to continue subsidizing essential goods in the next fiscal year (March 2021-22).

News ID: ۷۵۱۱۱۷

28 September 2020

According to Vice President Mohammad Baqer Nobakht, who doubles as the chairman of Iran’s Plan and Budget Organization, the government will channel earnings from oil exports to import essential goods at the subsidized rate of 42,000 rials per US dollar.

He made the remarks on the sidelines of a meeting of the so-called Budget Headquarters 1400 (the Iranian year starting March 2021), Mehr News Agency reported.

The Plan and Budget Organization held the first meeting of the headquarters on Aug. 22. Discussions centered on the makeup of the headquarters, the Joint Commission—a parliamentary body responsible for reviewing the budget bill as well as the five-year economic development plans—and eight specialized taskforces.

These meetings are being held regularly up until Budget Day (the day that the government presents its budget to the legislature for approval), i.e. Dec. 2.

Essential Goods in the Limelight

Also known as necessity goods, essential goods are products consumers will buy, regardless of changes in income levels.

Amid high inflation and diminished purchasing power, the Iranian government has sought to ensure a steady supply of essential goods at subsidized prices.

Following the re-tanking of the national currency in early 2017, the government introduced stringent rules like banning the import of non-essential goods, especially those produced inside the country (known as Group IV goods). It allocated subsidized currency at the rate of 42,000 rials to a dollar to 25 categories of goods (also known as Group I or essential goods) to help protect consumers against galloping inflation, rampant price gouging and hoarding, not to mention the high and rising cost of living.

Two other categories of imports were also defined: Group II, which mostly included raw materials, intermediate and capital goods, and Group III consisting of essential consumer goods.

Importers of products in Group II were to meet their forex requirements from the secondary forex market, known by its Persian name Nima. Importers of goods in Group III could buy hard currency from exporters who were not required to offer their forex earnings on Nima.

In the last fiscal year (March 2019-20), the government removed five items, namely red meat, butter, pulses, tea and sugar, from the list of basic goods entitled to subsidized currency.

So far, vegetable oil, oilseeds, corn, barley, soybean meal, raw materials used in manufacturing tires, heavy-duty vehicle tires, paper pulp and different types of paper are still considered essential goods.

Divided Opinion

Opinion is divided on whether this policy has been effective in keeping consumer prices in check. Data show consumer subsidies have helped prevent a surge in the price of rice, cooking oil and chicken, which have a big share in the food basket of low-income groups.

However, Mohammad Hassan Sabouri Deylami, an economic analyst, university instructor and senior official with the Industries Ministry, this policy is not sustainable. It needs to be rewritten and updated because the government’s foreign reserves are depleting rapidly.

There are persistent calls from across the board to reduce the ballooning deficit and instill monetary discipline—a need long absent, no matter what government is in office in Tehran.

"Imagine the subsidized forex policy as a tranquilizer to cushion the first blows emanating from the depreciating rial. As time passes, the financial burden of this time-tested policy must be reduced to minimize its adverse effects and the harm it will inflict on the economy in the form of galloping inflation," Sabouri said in an interview with Fars News Agency earlier this year.

"However, safeguarding livelihoods, particularly of those in the low-income bracket, is contingent upon implementing alternative policies, such as cash subsidies.”

Over 10 million tons of essential goods worth $4.7 billion have been cleared from Iran's customs terminals during the first five months of the current Iranian year (March 20-Aug. 21).

A total of 25.09 million tons of essential goods worth close to $15.5 billion were imported into Iran during the last fiscal year (March 2019-20) to register a 20.77% and 17.13% increase in weight and value respectively, compared with the year before, according to the spokesman of the Islamic Republic of Iran Customs administration, Rouhollah Latifi.

“This amount of essential goods imports accounted for close to 71% and 35% of the volume and value of last year’s total imports respectively,” the spokesman was quoted as saying by ISNA.

“The imported essential commodities included wheat, sugar, corn, rubber, barley, processed tea, rice, different kinds of seeds, red meat, soybeans, pulses, paper, fertilizers and industrial machinery.”

Means to Raise Funds

Nobakht said the government will also seek to raise funds through the presale of oil at $40 per barrel to members of the public within the next six months, adding that policies that will help reduce reliance on oil revenues will be pursued as per next year’s budget.

“Public resources will play a decisive role in pulling the country out of recession. The government will invest in civil development projects to achieve economic growth,” he said.

“Contractionary monetary policies to reduce inflation will be employed by the Central Bank of Iran and expansionary fiscal policies to increase aggregate demand by boosting people’s purchasing power and improving consumption by the private sector will be applied by the Plan and Budget Organization next year. We will need more resources in addition to what we would earn from selling oil, that is earnings from taxation and customs duties.”

Nobakht noted that the government is intent on carrying out structural reforms in the budget, by tapping into tax revenue potential without resorting to tariff hikes and even decreasing the production sector’s tax rate.

“A 4-5% decline in tax rates of the production sector has been envisioned in the next fiscal year's budget (March 2020-21). Tax on consumption, however, will increase next year," he added.

With the freefall in oil prices and the spread of the new coronavirus, the government is getting more and more worked up every year, especially due to the fiscal burden of sanctions and the decline in oil sales.

In the fiscal 2019-20, the relatively smaller size of the budget deficit, the availability of foreign exchange reserves from the National Development Fund of Iran and the untapped potential of debt bonds prevented to some degree the aftereffects of the deficit to strongly impact the economy.

In the current fiscal year (March 2020-21), the widening budget deficit, reliance of budget on financial bonds, the drastic fall in oil prices as well as tax revenues and the mounting costs of coronavirus outbreak are bound to compound the government’s economic woes.

Due to the economic problems and devastating impact of the coronavirus pandemic, the government’s success in raising taxes is apparently limited as businesses are already hit hard and many have shuttered.

“Next year, the government will opt for beefing up non-oil exports by promoting the production of knowledge-based companies and the added value of infrastructural projects,” he said.

Stressing that the capital market offers an opportunity to raise funds, Nobakht said more than 350 trillion rials ($1.21 billion) were gained from the stock market over the first five months of the year (March 20-August 21).