Subsidies for Import of Wheat, Medicines to Stay Until March

EghtesadOnline: The government may decide to remove certain commodities from the list of imports entitled to subsidized dollar at the rate of 42,000 rials, but it is certain that wheat and medicines will remain in the list until the end of the current fiscal year (March 2022), says the head of parliament’s Budget Reform Committee, Mohsen Zanganeh.

News ID: ۷۸۷۳۰۹

20 November 2021

The statement came after the Iranian Parliament last week opposed the double-urgency motion on the elimination of subsidized dollar for importing essential goods, adding it to the parliament’s future schedule.

Lawmakers opposing the cessation of payments of cheap subsidies to importers at the rate of 42,000 rials per US dollar believe that with the inflation rate standing above 45% and prices of some medicines going through the roof, the move would inflict another shock to the economy.

According to the Statistical Center of Iran, the inflation rate increased from 8.2% in the year ending March 2018 to 45.4% in the month ending Oct. 22, 2021.

The annualized inflation rate of food and beverages jumped from 12.3% to 61.4% during the period under review while that of health and treatment services increased from 7.2% in the fiscal 2017-18 to 40.4% in the current year.

A significant deviation from the objectives of allocating subsidies is observed when you compare these figures and this cannot be blamed entirely on sanctions. The government’s cumbersome bureaucratic procedures and extensive rent-seeking activities are partly to blame.

An example can be found in the 2018-19 annual report of the Supreme Audit Court of Iran, the supervisory arm of the Iranian Parliament, saying up to $4.8 billion worth of government subsidies on imports were unaccounted for.

Controversies around subsidized forex will not only remain unresolved but will also prolong when the parliament begins weighing the bill according to its scheduled timeline, the Persian daily Etemad reported.

When the parliament voiced its opposition to the double-urgency plan on terminating subsidized imports, controversies entered a new phase. Not long ago, nearly all experts close to the government and representatives showed supported the plan on the elimination of subsidized forex. There were talks of the government planning the gradual, cautious removal of these subsidies, to which some lawmakers responded by urging the government to go cold turkey.

But on Sunday, suddenly the parliament decided to take time to probe the matter, suggesting that the parliament is still reluctant about the removal of import subsidies despite the government’s economic woes.

Zanganeh says the government does not need the approval of the parliament for the elimination of subsidized import regime, yet it needs the legislative body’s go-ahead to increase the budget ceiling for this purpose.

The Budget Law of 2021-22 has allocated $9-10 billion for the subsidized import of essential goods and pharmaceuticals. The Central Bank of Iran says it provided $9.5 billion for importers of essential goods by Sept. 22, of which $400 million have been spent on the import of vaccines.

Essential Import Bill

A total of 18.7 million tons of essential goods worth $11.5 billion were imported from the beginning of the current Iranian year on March 21 to Nov. 1, registering a 29% and 63% rise in weight and value respectively, compared with the similar period of last year, according to the technical deputy of the Islamic Republic of Iran Customs Administration.

“Around $9.1 billion worth of goods, accounting for 79.1% of the overall volume, were imported using subsidized dollar at the rate of 42,000 rials per dollar,” Mehrdad Jamal Arvanaghi was also quoted as saying by ISNA.

These commodities, added the official, included 5.5 million tons of corn worth $1.9 billion, 1.3 million tons of unrefined and edible vegetable oils worth $1.8 billion, 12,500 tons of pharmaceuticals and medical equipment worth $1.3 billion, 3.6 million tons of wheat worth $1.2 billion, 1.7 million tons of oilseeds worth $1.2 billion, 1.7 million tons of soymeal worth $952.1 million and 2.2 million tons of barley worth $656.6 million.

“Moreover, 2.3 million tons of these goods, worth over $2.3 billion were purchased using the currency available at the secondary foreign exchange market, known locally as Nima,” he added.

Nima is an online platform affiliated to the Central Bank of Iran where exporters sell their overseas currency income and companies buy it for importing goods, machinery, equipment and raw materials.

Nima rates are much higher than 42,000 rials per dollar, but slightly lower than market prices hovering around 280,000.

Close to 781,800 tons of rice worth $663.2 million, 887,500 tons of sugar worth $384.4 million, 25,600 tons of essential goods for production and processing machinery worth $265.6 million, 44,900 tons of heavy vehicle tires worth $162.7 million, 141,300 tons of fertilizers worth $96.1 million, 224,600 tons of veterinarian medicines worth $27.9 million and a total of 456,100 tons of other goods worth $695.5 million were imported using Nima rates.

IRICA figures also show that until Nov. 1, more than 7 million tons of essential goods were still waiting to undergo clearance procedures in the country’s southern and northern ports.

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

Rise in Wheat Imports Amid Decline in Local Production

Wheat imports began in April and so far around 8 million tons of the staple grain have been purchased from foreign sources, CEO of the Government Trade Corporation, affiliated with the Agriculture Ministry, said earlier this month.

“More than 3 million tons of the purchased wheat have been imported so far and supplied in the local market. The remaining 5 million tons will gradually reach the country’s southern and northern ports to go through clearance procedures,” Yazdan Seif was also quoted as saying by ILNA.

The official noted that this year the government has purchased only 4.53 million tons of wheat from local farmers as part of its guaranteed purchase plan, adding that this was due to an overall decline in production as a result of low precipitation, water scarcity and bad weather conditions.

“This left us with more than 8 million tons of deficit, as our annual domestic demand stands at 13 million tons. So the government set out to import the crop as soon as possible to be able to meet the local demand and fill the country’s strategic reserves,” he added.

Seif said this year’s need for wheat has been supplied and businesses, industries, bakeries and other consumers will have no problem in procuring the grain.

According to Mohammad Reza Mortazavi, the head of the Federation of Iranian Food Associations, this year’s wheat production stood at close to 5 million tons.

“Drought and water shortage hit after a few years of self-sufficiency. But what made matters worse is that the grain, due to its relative low price compared with other animal feed, was used in livestock and poultry farms,” he added.

The official said the country needs to store at least 3 million tons of wheat for its strategic reserves every year when production is normal, but the figure has to increase to 5 million tons at times when the harvest is hit by drought or other factors.

“Global wheat prices have reached their highest in the past five years. Grains in general have experienced a price rise of up to 80% at times. Russia, the US, Canada, Australia, Argentina, Germany and France are the world’s top wheat producers and Egypt, Iraq and China are the biggest importers,” he added.

Mortazavi said Russia is Iran’s main wheat supplier, followed by Germany and some Eastern European countries.

Inflationary Implications

The government set the fixed foreign exchange rate of 42,000 rials per US dollar in the month ending April 20, 2018. Imports of 27 groups of goods were subject to the government’s subsidies then.

At present, four to five groups of goods are still eligible for the subsidized forex.

The Statistical Center of Iran reported that since March 21, 2018, up until now, the annualized inflation rate has fluctuated greatly: It began an uptrend from 8% in the month ending April 20, 2018, to 42% in the month ending Oct. 22, 2019. It then entered a declining stage such that it dropped to 26% in the month ending August 21, 2020, but again rebounded in the current year to the unprecedented rate of 45.4% in the month ending Oct. 22.

Some experts don’t approve of the discontinuation of subsidized forex under the current circumstances; they believe that despite the costly expenditure of the allocation of subsidized forex, particularly for low-income individuals, its removal is bound to result in a sudden increase in the prices of essential goods and pharmaceuticals, which would affect more people.

Forty-two months into the introduction of subsidized forex, the deviation from the objective of the policy as a tranquilizer to cushion the first blows shooting out from the depreciating rial to low-income individuals is starkly clear, thanks to inflation statistics of different subcategories like health, treatment and food items.

Distribution of rent among favored groups and the rise in corruption and sales of goods at market rates were the main outcomes of the subsidized forex policy.

As per the report of the Ministry of Cooperatives, Labor and Social Welfare titled “Poverty Monitor in Fiscal 2020-21”, the inflation rate of food and beverages neared 90% in the month ending April 20, 2019, shortly before the end of the US waiver period for Iran’s oil customers.

By Feb. 19, 2020, the inflationary effects of sanctions almost disappeared and the inflation rate of these items reduced to 20-30%. But the outbreak of Covid-19 hurt Iran’s economy even harder.

The ministry believes that the main causes of the rise in the prices of essential goods and pharmaceuticals before the outbreak of the pandemic were the decline in oil exports and depreciation of local currency.

Price rises after the outbreak of the disease were to blame on other conditions, including the fall in the prices of oil and foreign resources and the recession emerging from low demand due to Covid-19 restrictions impacting economic activities in the fiscal 2020-21.

The whole thing accelerated the growth of year-on-year inflation rate, such that the year-on-year inflation rate stood at 47% in the fiscal 2020-21 and the YOY inflation of food and nonfood groups also stood at 67% and 40.5%, respectively.

The high inflation rate of “food and beverage” category forces people in low-income deciles to spend the lion’s share of their income on items included in this group, which widens the wealth gap.

Before the reimposition of sanctions, the ministry’s report says, 22% of people were living in absolute poverty in the year ending March 2018. In the following two years, the ratio of people living in poverty increased to 26% and 32%. In other words, 24 months since the introduction of the subsidized forex policy, the percentage of people living below poverty line increased by 10%.