Economist Specifies Preconditions for Ending Subsidized Import Policy

EghtesadOnline: Most economic experts concur that the government’s distribution of cheap dollar was a telling example of public fund misuse both regarding 25 items that were to be imported with the subsidized forex and people who were entrusted with the responsibility of importing them.

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08 January 2022

This was stated by Vahid Shaqaqi-Shahri, an economist and university professor, in a write-up for the Persian daily Ta’adol. A translation of the text follows:

Official figures indicate that a fund diversion to the tune of 3,000 trillion rials ($10 billion) has occurred during the process of distributing foreign currency resources at the exchange rate of 42,000 rials per US dollar among importers of essential goods. To offset the consequences of this misappropriation, which created multiple problems for the country’s foreign exchange market, the government narrowed down the number of essential goods subject to this subsidized forex policy from 25 items to seven.

While I wholeheartedly endorse the end of subsidized forex policy and the implementation of exchange rate unification, I want to offer some cautionary remarks.

The reform policies’ executive mechanism and timing are what matter most. Everyone will welcome these reforms, provided that they are introduced only after necessary conditions have been fulfilled. If not, this metaphorical surgery would leave inflationary scars on the economy and raise the ire of the general public.

Iran’s economy once introduced the exchange rate unification policy in 1992-93, when President Akbar Hashemi Rafsanjani was in office. At that time, the execution of the policy led to high inflation rates; in 1995-96, the inflation rate hit 49%, giving a large negative wallop to the pressure the economy was already experiencing. Eventually, the government was forced to back down and rescind the policy.

Later, President Seyyed Mohammad Khatami and his reformist allies reintroduced the exchange rate unification policy in 2002-3. Contrary to the previous experience, the government achieved admirable economic results; an acceptable stability was created in forex and other markets.

These two experiences show that economic strategies can be made to work in the proper context and conditions.

Therefore, I agree with terminating subsidized forex policy after meeting requirements and preconditions. In fact, the government’s supply of cheap dollar to the import of essential goods should continue until the stage has been set for its exit from Iran’s economy. That’s because the inflation resulting from the termination of the policy can create more difficult conditions for people’s livelihoods and impose heavy pressure on low-income deciles.

Five Preconditions

Before the introduction of forex reform policy, first and foremost, the economy must see a period of stability. Secondly, the exchange rate and inflationary expectations should show a downtrend. The third condition is that the government should have adequate resources in local currency to manage this surgery; no shortage of local currency should be felt in this regard. The fourth condition is that the government should have an adequate foreign exchange resources to control supply and demand at any time. The fifth and final condition is that it must go through this process in a determined manner, whether the country reaches a nuclear agreement with the P4+1 group of countries and the United States.

If these five preconditions are met, the government can get rid of subsidized forex policy for the remaining seven items. Until these conditions have not been fulfilled, the government should continue the allocation of forex subsidies.

In addition, after meeting these preconditions, the subsidy removal process should be carried out gradually over a specified period of time, meaning that the government should not go cold turkey and suddenly announce that the distribution of subsidized dollar has ended. The cessation of forex subsidy must happen over one to two years and under appropriate conditions.

Such an approach can be likened to specialized surgeries conducted in hospitals. When a patient goes to a hospital, physicians monitor their vital signs, including blood pressure, blood sugar and cholesterol, before taking any action. If the patient’s vital signs are abnormal, the surgical team will refer the patient to other specialists such as cardiologists and endocrinologists.

The same protocol prevails in the economy. That is, first, the vital signs of the patient named Iran’s economy must return to normal and then the patient can undergo major economic surgeries. Vital signs are those aforementioned conditions. If these conditions are met, the major surgery of removing subsidies can be performed, but if these preconditions are not met, any action will lead to a worsening of the economic and living conditions of the people; it will be more destructive than the distribution of foreign-source subsidies.

With these explanations, what adverse consequences will emerge after the termination of subsidized forex policy under the current economic conditions is clear, as the country is suffering from extensive economic sanctions, foreign currency shortages and high inflationary expectations, among others.