CBI Rebuffs Majlis Move to Raise Forex Rates in Budget

EghtesadOnline: The Governor of the Central Bank of Iran Abdolnasser Hemmati criticized the parliament’s decision to raise forex rates for importing essential goods, saying that it would negatively impact monetary variables.

News ID: ۷۵۱۷۷۶

05 January 2021

The Majlis Joint Commission, an ad hoc commission in charge of reviewing the budget, voted Saturday to raise foreign currency rates by more than 400% for importing basic goods from the subsidized $1=42,000 rials to 175,000 rials.

The cheap currency is sourced from oil export and used only for importing basic goods, pharmaceuticals and machinery to avoid price hikes for food and raw materials.

Responding to the rare legislative move, Hemmati said "It is not in the interest of the economy," IBENA, the news agency affiliated to the Monetary and Banking Research Institute, reported.

Recalling the intricacy involved in deciding forex rates, the senior banker noted that the issue “is of great importance and the government has decided on the rate with utmost sensitivity".

The parliament’s decision comes after the budget bill came under fire by economic experts for being “overtly optimistic” on the revenue side.

The MPs move is apparently with aim of adjusting the government’s projected earnings from oil and gas export. It originally predicted to sell 2.3 million barrels of crude oil at $40/barrel with an exchange rate of 115,000 rials to the dollar.

Rejecting the forecast as "unrealistic" and "unrealizable" due to tough US restrictions on oil and other exports, the joint commission cut crude sale to 1.5 million barrels a day to make the budget "less dependent on oil".

Hemmati defended the government's initial crude sale projection, saying that the projected earnings can be realized "given the recent surge in oil and petroleum exports and the possibility of easing sanctions.”

"It is not clear on what premise the dollar rate was set at 175,000 rials. Setting this as an official rate is not in the interest of the economy.”

As one of the ramifications of the decision, he pointed to the impact on the "financial relations of the government and the central bank", and by extension, on the CBI balance sheet. He said the decision will increase the monetary base and expand money supply.

Rent-Seeking

The joint commission spokesperson Rahim Zare'e defended the Majlis decision to scrap allocation of cheap currency for import and dismissed concerns about its probable impact on price of essential goods.

The move is aimed at preventing the sale of subsidized imported goods at free market rates and fight rent-seeking and corrupt practices, he said.

“Importers used to sell goods at prices determined by the free market despite the government forex subsidies [42,000 rials/USD],” he was quoted as saying by IRNA.

Elaborating on the obviously controversial decision he said,  "The people can rest assured that the earnings [from increase in forex rates] will help improve their livelihood, health and education".

While successive governments have subsidized food imports, cheap currency in its current form was offered after the steep rise in forex rates in the spring of 2018 when the government set the dollar rate at 42,000 rials and cut the list of goods eligible for subsidies to a few essential goods like food, raw material and pharmaceuticals.

The policy attracted strong and persistent opposition for its susceptibly to rent-seeking and corruption due to the huge difference between the subsidized currency rates and open market prices. In the open market on Monday the dollar was quoted at about 258,000 rials.