Reservations About Future of Currency Subsidy Policy

EghtesadOnline: The government’s plans to end subsidized currency for importing basic goods will expose companies to increasingly higher working capital needs.

News ID: ۷۸۷۰۷۷

29 September 2021

Head of the Agriculture Commission of Tehran Chamber of Commerce Industries Mines and Agriculture (TCCIM), Kaveh Zargaran, made the statement in a meeting with the Agriculture Minister Javad Sadati-Nejad on Tuesday.

In the past three years the government gave subsidized currency for importing basic goods. Under the apparently failed scheme the dollar was sold to importers for 42,000 rials -- the rate was almost a seventh of the value in the open market.

Welcoming moves to put a permanent end to forex subsidies, Zargaran anticipated liquidity shortages in the aftermath as companies would need more money for imports.

“Policymakers must beware that after eliminating the currency subsidy policy, manufactures’ need for working capital will jump fivefold,” he was quoted as saying by the TCCIM website.

Zargaran called on those in charge to take appropriate measures to handle the issue, recalling that the banking sector is unable to provide funds for businesses.

Cheap currency is sourced from oil export revenue that has diminished to unprecedented levels due to the US economic sanctions and are used only for importing essential goods, pharmaceuticals and machinery. The scheme was designed to avoid price hikes in food and raw materials and protect consumers against inflation arising from high and rising currency rates in the market.

Economists across the board, businesspeople, market watchers, lawmakers and government officials are unanimous in the view that that policy was a strategic error of judgment and was riddled with holes, thanks to vested interests.

Observers say the huge difference between the subsidized currency rates and the open market had paved the way for rent-seeking, fraud and embezzlement.

Undecided Still

As per provisions of the March 2021-22 budget, the government is obliged to end the forex subsidy policy but seems hesitant due to the highly likely inflation consequences.

In the budget law the subsidized foreign currency allocation policy expired on Sept. 22.

While the government has so far deferred any decision in this regard, Zargaran said it seems that the Raisi administration is resolved to scrap the controversial policy. “The private sector is of the opinion that this will happen in the next three months.”

During the meeting, Masoud Khansari, a strong opponent of the subsidy policy, reiterated that subsidizing currency for import is harmful for economic activity.

“Multiple exchange rates and maintaining the forex subsidy  policy is the bane of the business environment and the economic system as a whole,” he warned.

He said the agriculture sector is grappling with “high inflation, lack of investment and mandatory prices” imposed by the government.

Subsidized currency in its current format 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 slashed the list of goods eligible for subsidized currency to a few essential goods.

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

$4.6b Allocated in 4 Months

The Central Bank of Iran allocated $15 billion for the import of essential goods in the first four months of the current Iranian year (March 21-July 22), 27% more than the corresponding period last year.

The provision of subsidized foreign currency at the rate of 42,000 rials per dollar increased by 70% to reach $4.6 billion during the same period, the central bank reported on its website.

CBI data show it gave $1.5 billion to import corn, barley and wheat; $1.1 billion for oilseeds and raw oil, $1.2 billion for pharmaceuticals and medical equipment and $348 million to import soymeal.

Almost $10.4 billion was made available for importing other commodities – up 15% growth year-on-year.