Majlis Sets $8b Subsidy Cap for Importing Basic Goods

EghtesadOnline: The Majlis on Monday restricted the government’s ability to use subsidized foreign currency for importing basic goods in the next fiscal year that begins in March.

News ID: ۷۸۶۰۸۶

23 February 2021

Reviewing the next budget bill, MPs approved a government proposal in the revised version of the budget to continue the policy to allocating cheap currency for critical imports.

They, however, decided that the government must mot earmark more than $8 billion in cheap currency for importing basic goods and pharmaceuticals, the parliamentary news website ICANA reported.

In the past two and a half years the government subsidized the import of basic goods by disbursing one US dollar at 42,000 rials, almost a fifth of the value in the open forex market.

Cheap currency for decades has been sourced from oil export revenue now shrunk under US sanctions plus the Central Bank of Iran's limited reserves. It is used only for importing essential goods, pharmaceuticals and machinery to prevent hoarding and price gauging of food and raw materials.

As per the parliamentary move, the government is obliged to put a permanent end to the controversial subsidy policy in coming year.

"The government is obliged to gradually increase forex rates for  import after exploring the economic, social and international conditions," the lawmakers said.

The Majlis Joint Commission in December had rejected a government proposal in the initial budget draft for continuing the forex subsidy policy next year.

Instead, the commission favored changing the forex rate for import of essential goods from 42,000 rials to 175,000 rials to a dollar, suggesting that the prices of essential imports should be set in accordance with exchange rates 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 exchange rate approved by the commission was criticized by the government and it argued that setting USD at 175,000 rials will send a wrong signal to the chaotic currency market.

The government included the provisions in the revised version of the budget draft "to avoid any potential shock to markets and prices".

Rent-Seeking

ICANA described the MPs move to limit access to cheap forex as "a step toward fighting rent-seeking."  The policy has attracted strong and persistent opposition for its susceptibility to rent-seeking and corruption, due to the huge difference between the subsidized currency rates and the open market.

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

Earlier in the week, the Governor of Central Bank of Iran Abdolnasser Hemmati said the bank had given more than $9.2 billion in subsidized forex for importing basic goods since the beginning of current fiscal year until mid-February.

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

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. Then 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.