Subsidized Import Forex to Stay

EghtesadOnline: The controversial plan allocating cheap foreign currency for import will continue in the next fiscal year (starting March 20).

News ID: ۷۸۶۰۳۳

17 February 2021

The decision is part of the revisions made to the draft of the next fiscal budget after it was rejected by Majlis earlier in the month.

Speaking in a parliamentary session on Tuesday while submitting the new budget bill, Mohammad Baqer Nobakht, the head of Plan and Budget Organization, said the subsidized foreign currency allocation policy has been envisioned to stay in the first six months of the next fiscal year (ending Sept. 21).

"In the revised draft, we tried to avoid any potential shock to markets and prices," he was quoted as saying by IRNA.

"It has been decided to keep the subsidized currency policy in the first half of next year in order to buy time to pave the way for raising the foreign exchange rates [allocated to import]."

The government in the past two and a half years has subsidized the currency for importing basic goods where a US dollar is worth 42,000 rials, almost a fifth of its value at the open currency market.

The Joint Commission of Iranian Parliament in December had rejected the government proposal in the initial fiscal budget draft for keeping the same subsidized forex policy next year.

Instead, the commission voted in favor of changing the foreign exchange rate for the import of essential goods from 42,000 rials to 175,000 rials per dollar, suggesting that the prices of essential imports should be set in accordance with the exchange rate prevailing in the so-called secondary forex market, known by its Persian acronym Nima.

Nima is a currency trade platform, affiliated to the Central Bank of Iran, where exporters sell their overseas proceeds to importers. The rates at Nima are slightly lower than the rate of the open market where USD is currently trading at 250,000 rials.

The MPs approved the outlines of the revised version of the budget bill on Tuesday, but it remains to be seen how they approach the government’s proposal about continuing the subsidized forex policy for import next year.

The cheap currency has been sourced from oil export revenue and used only for importing essential goods, pharmaceuticals and machinery to avoid price hikes in food and raw materials.

Oft-Criticized Policy

While successive governments have routinely 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 at a fixed rate of 42,000 rials and cut the list of goods eligible for subsidized currency to a few essential goods like food, raw material and pharmaceuticals.

The policy attracted strong and persistent opposition for its susceptibility to rent-seeking and corruption, due to the huge difference between the subsidized currency rates and those in the open market.

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

Economic experts have faulted the subsidy distribution system and the absence of efficient government oversight. They point out that people buy food and other essential goods at open market rates, despite the fact that the goods are imported at highly subsidized rates.