Metrics Are Under Review to Slowly Remove Forex Subsidy

EghtesadOnline: The Economy Minister Ehsan Khandouzi said Tuesday the government is determined to take the first step towards gradually eliminating subsidized currency in this fiscal year.

News ID: ۷۸۷۸۲۵

20 April 2022

"For sure the government will start making changes to the current system of distributing subsidies; however, the mechanism of implementing the plan as well as its timeline, prioritized essential goods and other details are still being studied and discussed by the government, since any decision in this regard can and will have a huge impact on the economy," Khandouzi said, IRNA reported.

He added that the government seeks to raise the predictability of the economy "though I admit that in some cases we have failed to achieve this goal."

Forex subsidy ($1=42,000 rials) given by the government under former president Hassan Rouhani is seen as highly costly and controversial by some economists and the Raisi administration.

They claim that that failed policy was oxygen for corruption and rent-seeking that lined the pockets of vested interests at the expense of the public. In fact the case for and against the costly, and now prohibitive, billions in payouts has appeared, disappeared and reappeared over the past three decades.

President Ebrahim Raisi has expressed strong reservations about continuing the controversial policy of subsidizing the increasingly scarce foreign currency after the former US president Donald Trump imposed an economic blockade on Iran in 2018.

Forex subsidy is sourced from oil export revenue that has plunged to unprecedented levels (though the situation has improved since January as oil imports have increased) due to the US sanctions and is used only for importing food, essential goods, pharmaceuticals and machinery.

Also known as necessity or basic goods, essential goods are products consumers buy, regardless of declining income.

Experts and policymakers who oppose the end of subsidized imports argue that the inflation rate officially hovering around over 45% and prices of medicine going through the roof, the move would be another big shock to the poor, fixed-wage earners and those at the end of the economic ladder.

The Majlis recently allowed the government full authority over reversing the subsidy policy but has obliged it to return the subsidies to the public using “alternative schemes.

There has been talk about introducing credit cards to control the inflationary impact of subsidies that would be given directly to consumers if and when the forex subsidies are lifted.

The government said it has earmarked 1,000 trillion rials ($3.5 billion) to help compensate the elimination of forex subsidies in the 2022-23 budget.

According to the Islamic Republic of Iran Customs Administration, seven key essential goods weighing 20.17 million tons worth $11.14 billion were imported using subsidized foreign currency at the rate of 42,000 rials per dollar during the first nine months of the last fiscal year that ended in March – up 36% and 83%, respectively, on the same period last year.