Scrapping the controversial forex subsidies is one of the critical issues in the next budget submitted to the parliament by President Ebrahim Raisi on Sunday.
As per the bill, the government will give this amount “to offset price rises of basic goods, pharmaceuticals, bread and guaranteed-purchase of wheat”, local media reported.
The much talked-about move should put a permanent end to the yearslong debate on whether or not to end the increasingly costly and corruption-tainted subsidy policy.
Since mid-2018, the government has subsidized currency for importing basic goods ( $1=42,000 rials). The highly subsidized rate is less than a seventh of the real prices in the open market and has been fertile ground for rent-seeking by some big import companies, vested interests and state cronies.
Subsidized forex is gotten from oil export and used only for importing essential goods, pharmaceuticals and machinery to avoid price hikes in food and raw materials.
While successive governments as a matter of policy subsidized food imports, cheap currency in its current format was given after the steep rise in forex rates in the spring of 2018 soon after the United States under Donald Trump 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 under pressure was compelled to slash the list of goods eligible for subsidized currency.
In the present fiscal budget, the government was not allowed give more than $8 billion in subsidized currency for importing food and medicine. The Central Bank of Iran says what has indeed been paid so far is over and above the ceiling set in the budget.
According to customs data, 14.37 million tons of essential goods worth $8.8 billion were imported in the first seven months of the current calendar year (March-Oct), 25% and 95% higher, respectively, on the same period of last year.
So far nothing is known about how the government wants to compensate for a likely increase in prices after the forex subsidies become a thing of the past if the budget is approved by the Majlis.
Observers say the $3.4b will be channeled to the low-income strata in the form of cash subsidy.
Faults in the Subsidy System
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 the cheap forex is pocketed by big importers and the distribution chain instead of end customers, which ostensibly means the millions of Iranians at the lower-end of the economic ladder.
It is often heard and said in Tehran’s politico-economic circles that in the past three years billions in subsidized currency was given to selected companies to import food and medicine and 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 thefts or faced the full force of the law.