EghtesadOnline: The abolition of the 42,000 rials per dollar exchange rate for the import of essential goods recently approved by Majlis Joint Commission is bound to increase inflation, says the head of Plan and Budget Organization.
“The public cannot afford higher inflation rates and further economic pressure under the current circumstances,” Hamidreza Haji-Babaie was quoted as saying by IRNA.
Majlis Joint Commission recently decided to change the exchange rate for essential goods import from 42,000 rials to 175,000 rials per dollar, suggesting that the prices of essential imports would be set in accordance with the exchange rate of the secondary FX market, known by its Persian name Nima.
The real market price of the dollar is around 60% higher.
Also known as necessity goods, essential goods are products consumers will buy, regardless of changes in income levels.
Majlis Joint Commission, composed of representatives of all specialized parliamentary commissions, is responsible for reviewing budget bills as well as five-year development plans proposed by the government before they are put to a vote by MPs.
According to Rahim Zare’, the spokesman of the commission, the move is aimed at unifying the exchange rate and preventing the supply of imports at free market rate by importers and fighting rent-seeking and corrupt practices.
“Importers used to sell their products at prices determined by the free market despite the government’s allocation of subsidized forex at the rate of 42,000 rials per US dollar,” he said.
The government’s revenues are projected to increase by 400 trillion rials ($1.55 billion), provided that the commission’s proposal is approved by the parliament during an open session.
“Those who have proposed this bill say they have an aid package in mind to cushion the inflationary effect of the move, but the details of any such package has yet to be explained,” Haji-Babaie added.
Latest data released by the Statistical Center of Iran show the average goods and services Consumer Price Index in the 12-month period ending Dec. 20, which marks the end of the ninth Iranian month, increased by 30.5% compared with the corresponding period of last year.
Breeding Ground for Corruption Remains
Echoing the same viewpoint, Ali Shariati, a member of Iran Chamber of Commerce, Industries, Mines and Agriculture, says reforms that give rise to golden signature (a metaphor used in Farsi to suggest influence peddling), duality of foreign exchange rate and arbitrage pave the way for new corrupt activities, so the adoption of fixed foreign currency exchange rate, all over again, won’t improve the situation.
“ICCIMA, as the advisor to the three branches of the government, has time and again warned against the consequences of cheap forex policy but to no avail. The so-called economic mafia, given its influence in government or connections with persons in authority has managed to keep this policy for years; it’s three years now Iran’s economy is suffering from this policy lines,” he was quoted as saying by the news website of Tehran Chamber of Commerce, Industries, Mines and Agriculture.
“Following the delicate conditions facing the country in the fiscal 2018-19 [the dramatic depreciation of national currency], the government set the foreign exchange rate of 42,000 rials per US dollar for imports to soften the blow of inflation. But in actuality, the price gap, which was caused by the difference between subsidized and free market forex rates, set the stage for rent-seeking and corrupt practices to become even more widespread.”
Shariati noted that cheap dollars that were formerly distributed among 20 companies are now being given to more than 150 companies, companies belonging to government retirees, white collar employees and select persons.
“Smuggling of chicken and red meat became so prevalent that the government was forced to import meat by airplane. That is just a small example of the consequences of subsidized currency. Despite such problems, the government kept on giving out cheap dollars with the aim of financially supporting the people of modest means. Today, the pressure of sanctions and decline in foreign currency reserves have left the government thinking whether it should eliminate the forex subsidy,” he said.
“Structural change must be introduced. To give the poor or the producers a leg up, the government needs to extend direct support to the end consumer product or hand out subsidies to low-income deciles, the bottom links of the chain, as opening up opportunities for those links in the middle of the chain won’t produce the desired results.”
Shariati noted that staying away from emotionalism on the economic front is no less important than avoiding impulse decision-making when dealing with national security issues.
“Fixing the exchange rate on 175,000 rials per US dollar is as indefensible decision as setting it at 420,000 rials; it will create rent just like before,” he concluded.
Houman Hajipour of Business Department of TCCIM said Iran has constantly experienced a command economy.
“It is not clear on what basis the parliamentarians have arrived at this figure. The least we expected from the members of the Joint Commission was to lower the tariffs on one row as they increase them on another column appropriately,” he added.
Noting that five essential items that still receive subsidized forex account for a significant portion of imports, he said that from the operational point of view, trade expenses are bound to increase and the ensuing inflation next year would be a manifestation of this policy.
“There are three scenarios on the table for members of the Joint Commission whose mutual chapter is the rise of the dollar exchange rate to 175,000, the elimination of subsidized forex and increase in oil revenues proposed at 2,000 trillion rials [$7.69 billion] to 2,800 trillion rials [$10.76 billion]. Those scenarios are setting two ceilings for the government’s budget in H1 and H2 of the next fiscal year, increase in projected revenues of tax from 600 trillion rials [$2.3 billion] to 2,500 trillion rials [$9.61 billion], and lifting the ceiling of government’s operating budget to above 10,000 trillion rials [$38.46 billion]. The customs tariff on essential goods will also decrease from 5% to 3%,” he was quoted as saying by Eximnews.ir.
“Say, an item worth $100 is imported using the exchange rate of 42,000 rials and the customs tariff of 5%. As a result, the customs tax of the item would be 210,000 rials. The customs tax of the same item being imported using the exchange rate of 175,000 rials and the customs tariff of 3% would be 525,000 rials, i.e., a 2.2-fold increase. The formula of customs tax is foreign exchange rate multiplied by the price of imported item multiplied by customs tariff. Has the Joint Commission worked out this simple formula or have the officials with the Islamic Republic of Iran Customs Administration or the Ministry of Industries, Mining and Trade explained the formula and its impacts on the prices to parliamentarians?”
Hajipour noted that the psychological effects of the rise in the budget’s foreign exchange rate would impact production and have unpredictable negative ramifications.
“The end user would perceive that the official exchange rate has increased by more than 400%. Lack of collaboration between the government and the parliament and failure to consider the economic ramifications would challenge Iran’s economy and it’s the people who will pay the price of these miscalculations,” he said.