Businesses Concerned About Liquidity Crunch After Lifting of Forex Subsidies

EghtesadOnline: The reported government move to eliminate forex subsidies for import of basic goods would pose importers with new liquidity problems, businesspeople say.

News ID: ۷۸۷۴۹۱

25 December 2021

The government has called for putting an end to the controversial currency subsidies in the draft 2022-23 budget it presented to the parliament last week.

In 2018 the former government subsidized currency for importing food and other basic goods selling the US dollar for 42,000 rials. This rate is less than a seventh of the price in the open market where the greenback buys 300,000 rials.

The semi-official Fars News Agency in a report said if the subsidy policy is consigned to history companies that import raw material would obviously need huge amounts of rials to pay for the unsubsidized currency plus the rise in production costs.

Citing serious concerns voiced by the businesses, the news agency called on policymakers to consider workable measures to address the inevitable liquidity crunch if and when the subsidies become a thing of the past.

Saeedeh Mashayekhi, a guild official from the poultry industry, said the elimination of currency subsides would increase the poultry farmers need for capital by at least six-fold.

“The price of soybean is one example. Each kilogram of soybean now costs 37,000 rials. This will jump to 240,000 rials after the subsidies are lifted,” she said.  Soybean is the main protein supplement used in poultry farms.

Replacing One With the Other

Scrapping the controversial currency subsidy is a key issue in the proposed budget. Highly subsided currency is presently given only for importing medicine, wheat, oilseeds and livestock. As per the provisions of the budget bill, the government would kill the subsidies and instead pay cash to certain vulnerable sections of the society.

In its draft budget the government has said it will allocate 1,000 trillion rials ($3.3 billion) to compensate the elimination of currency subsidies, which would result in more shocking price rises of consumer goods, especially food.

As per the bill, cash subsidy will be given “to offset the price rise of basic goods, pharmaceuticals, bread and guaranteed-purchase of wheat”, according to the draft of the budget published by the local media.

Cheap currency is sourced from oil export revenue and used only for importing basic necessities to avoid price hikes in food and raw material.

There is unanimous agreement among experts that the food subsidy policy never achieved its genuine goal of supporting the low-income people, and in actuality vested interests and cronies in distribution chain benefited and pocketed billions.

Consumers of imported essential goods more often than not  buy goods at forex rates that are the same as the open market  due to loopholes in the complex distribution system and absence of efficient government oversight.

In short, unusually large amounts of the forex are given to importers and the inefficient and corruption-plagued distribution chain instead of end customers.