Majlis Commission Votes Against Eliminating Subsidized Imports

EghtesadOnline: The Majlis Joint Commission rejected the government proposal in the budget bill of the upcoming fiscal year (March 2022-23) to abolish the allocation of subsidy to import essential goods at the cheap rate of 42,000 rials per dollar.

News ID: ۷۸۷۷۱۵

31 January 2022

“As the government proposal is vague and unsubstantiated, the joint commission has decided to allocate $9 billion to supply [read import] medicines, medical equipment and essential goods at the preferential exchange rate [42,000 rials per US dollar] in the fiscal 2022-23,” spokesman of the commission, Rahim Zare’ was quoted as saying by ILNA on Saturday.

The $9 billion allocation is in addition to subsidies paid to import wheat, he added.

The joint commission is a parliamentary body responsible for reviewing the budget bill as well as five-year development plans proposed by the government before it is put to a legislative vote.

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

Another noteworthy decision made by the commission is its disapproval of the government proposal to cut in half the mandate to deposit 40% of its revenues from the export of oil, natural gas and gas condensates to the National Development Fund of Iran (NDFI), the sovereign wealth fund of the country.

The commission cited that in halving the 40% share to 20%, the government does not have the permission of the Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei.

With this decision, the shares of Oil Ministry and general budget from exports of oil, natural gas and gas condensates will be 14.5% and 45.5% respectively in the next fiscal year, the Persian economic daily Donya-e-Eqtesad reported.

The decision came after MPs had given the green light earlier this month to elimination of subsidized imports at the rate of 42,000 per dollar as of next fiscal year (starting March 21).

Costly, Corruption-Tainted Policy

The abolition would have put an end to the years-long debate on whether or not to end the increasingly costly and corruption-tainted subsidy policy.

The government said it allocated 1,000 trillion rials ($3.5 billion) to help compensate the elimination of subsidized foreign currency in the 2022-23 budget.

As per the budget bill, the government will pay the $3.3 billion “to offset price rises of basic goods, pharmaceuticals, bread and guaranteed-purchase of wheat”, local media outlets reported.

Since mid-2018, the government has subsidized currency for importing basic goods ($1=42,000 rials). The highly subsidized rate is about a seventh of the real prices in the open market and offers a fertile ground for rent-seeking by some big import companies, vested interests and state cronies.

Subsidized forex is received from oil export and used only for importing essential goods, pharmaceuticals and machinery to avoid price hikes in food and raw materials.

While successive Iranian governments have subsidized food imports, cheap currency in its current format was first allocated after the steep rise in foreign exchange rates in the spring of 2018 soon after the United States abandoned the Iran nuclear deal and imposed tough economic sanctions.

Flaws in the apparently ill-advised policy emerged in the first few months after inception and the government was compelled under pressure to slash the list of goods eligible for subsidized currency.

In the present fiscal budget, the government was not allowed to pay more than $8 billion in subsidized currency for importing food and medicine. The Central Bank of Iran says what has been paid so far is over and above the ceiling set in the budget.

The $3.4 billion will likely be channeled to the low-income strata in the form of cash subsidy.

Prominent economists, academia and socioeconomic experts hold the strong opinion that the forex subsidy policy never achieved its intended goal of supporting the downtrodden, and greedy middlemen and cronies in the distribution chain benefited the most.

On many occasions, consumers of imported essential goods must buy their needs at prices that equal open market forex rates, thanks to the gross mismanagement, inefficient distribution system and absence of viable government oversight.

In short, a significant portion of cheap forex is pocketed by big importers and the distribution chain instead of end customers, which ostensibly means millions of Iranians remain at the lower-end of the economic ladder.

Tehran’s politico-economic circles claim that in the past three years, billions in subsidized currency were given to selected companies to import food and medicine, yet some of these companies simply did not bring anything into the country.

It later turned out that some of the firms who took the scarce forex resources were shell companies. Few, if any, have paid for the theft, or faced the full force of the law.

Preconditions Not Met

Vahid Shaqaqi-Shahri, an economist and university professor, says before the introduction of forex reform policy, certain preconditions must be met.

“First and foremost the economy must see a period of stability. Secondly, the exchange rate and inflationary expectations should show a downward trend. The third condition is that the government should have adequate resources in local currency to manage this reform; no shortage of local-source currency should be felt in this regard. The fourth condition is that the government should have adequate foreign exchange resources to control supply and demand in the forex market at any time,” he said.

“The fifth and final condition is that it must be determined whether the country has reached a nuclear agreement with the P4+1 group of countries and the United States. If these five conditions are met, the government can get rid of subsidized forex policy for the remaining seven items. As long as these conditions are not fulfilled, the government needs to continue the allocation of forex subsidies.”

In an article for the Persian newspaper Ta’adol, he wrote: “After meeting these preconditions, the subsidy removal process should be carried out gradually over a specific 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.”

Q1-3 $11.14 Billion Bill

According to the Islamic Republic of Iran Customs Administration, seven types of commodities weighing 20.17 million tons and valued at $11.14 billion in total were imported using subsidized foreign currency at the rate of 42,000 rials per dollar during the first nine months of the current fiscal year (March 21-Dec. 21, 2021), registering a respective rise of 36% and 83% compared with the similar period of last year.

The top three imported commodities in this category included 7.05 million tons of corn worth $2.24 billion (registering a 3% fall in weight and a 35% rise in value year-on-year), 1.53 million tons of unrefined and edible vegetable oil worth $2.08 billion (up 102% in weight and 231% in value YOY), 5.02 million tons of wheat worth $1.71 billion (up 101% in volume and 147% in value YOY),

Other essential goods imported during the period were 16,274 tons of pharmaceuticals and medical equipment worth $1.67 billion (up 42% and 36% in weight and value respectively YOY), 1.99 million tons of oilseeds worth $1.39 billion (up 8% in weight and 47% in value), 1.96 million tons of soymeal worth $1.08 billion (up 77% in volume and 134% in value) and 2.61 million tons of barley worth $767.52 million (up 94% in weight and 135% in value).