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EghtesadOnline: The head of the Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIM,) Masoud Khansari, said the government policy of subsidizing foreign currency is partly responsible for the massive growth in money supply.

Addressing a TCCIM session, Khansari said the controversial subsidized currency policy increased broad money by at least 7,500 trillion rials ($26.7 billion) in the last fiscal year (March 2020-21), the TCCIM website reported.

In three years the government gave cheap currency for importing basic goods ($1=42,000 rials), which was and is almost a seventh of the rates in the open market.

The cheaper currency is sourced from oil exports and used only for importing basic necessities to avoid unaffordable price hikes in food and raw material.

“The government allocated $10.5 billion in subsidized currency for [basic] imports last year, half of which was sourced from oil export and the other half from CBI reserves or the National Development Fund of Iran,” he noted.

Pointing to the $5 billion taken by the CBI, he said the CBI was forced to issue about 1,000 trillion rials ($3.5b) in fiat money. The figure is based on the difference of a subsidized dollar at 42,000 rials and its rate in the market (average 270,000 rials last year).  In short, for each subsidized dollar the CBI created 21,800 rials in new money last year.

“The government hardly earns anything from selling crude oil and has to borrow from the CBI to pay for importing basic goods,” he said, calling for a permanent end to the corruption-infested forex subsidy policy.

“This policy not only paved the way for corruption, rent-seeking and smuggling, but also undermined the economy and the budget,” the senior business leader said.  

Broad money supply reached 34,761.7 trillion ($125b) at the end of the last fiscal year in March -- 40.6% higher on the earlier year.

Government Dilemma

The government is under mounting pressure to put aside the tried, tested and failed subsidy policy or rewrite the method of allocating subsidized forex. Last week. The Raisi administration submitted a bill to the Majlis seeking more cheap currency for the calendar year ending in March 2022.

Provisions of the bill call for increasing access to subsidized currency by $4.6 billion over and above the $8 billion already agreed to.  

The government wants the parliament to let it continue selling subsidized currency to importers or give cash subsidy to the people. The Majlis rejected the urgency of the bill on Sunday  postponing discussion to a later unknown date.  

As per the March 2021-22 budget, the government should have ended the forex subsidy policy in September but was restrained by its potential inflationary consequences.

Governments for more than five decades have subsidized food imports, cheap currency in its current form was offered after the steep rise in rates in the spring of 2018 when the government pegged the official dollar rate of 42,000 rials and cut the list of goods eligible for subsidized currency to a few essential goods.

Economists, businesses of all stripes, lawmakers and government officials are unanimous in that the currency subsidy policy was doomed for its inherently corrupted features.

 Observers rightly stress that the huge difference between the subsidized currency rates and the open market was, is, and will always be fertile ground for rampant embezzlement, corruption and rent-seeking for which the common people pay a high price.