June 28, 2019
A Tehran economist says Iran’s economic turmoil is heavily the result of grossly distorted policies on subsidized foreign exchange.
Writing in the economic daily Donya-e Eqtesad (Economic World), Hamid Azar-mand says the use of subsidized foreign exchange to import food—the commodity for which more than half of subsidized foreign exchange is used—meant that foreign food was imported at prices below the local cost of production, which both drove farmers’ revenues into the ground and chewed up foreign exchange that could have been used much more usefully on other goods.
Following last year’s depreciation of the rial and in a bid to ease the financial burden on Iranian households, the government initiated a policy of massive subsidized foreign currency grants to import essential foods. The dollars used for this purpose are sold to importers for 42,000 rials while on the open market the dollar now sells for about 130,000 rials.
Azarmand said this policy, unlike what the government had expected, failed to lower household expenses and also plunged the country deeper into recession—a double whammy of harm.
“Data provided by the Islamic Republic of Iran Customs Administration show that last year, imports of maize, rice, soybeans, soybean oilcake and raw vegetable oils increased, in terms of weight, by 23%, 24%, 17%, 13% and 23% respectively compared with the year before”—all huge jumps that didn’t reflect consumption requirements.
“The country became overwhelmed with products whose importers received subsidized foreign currency from the government, thanks to the fat profit margins involved in their imports,” he said.
“The rise in imports of essential goods is, in fact, synonymous with a decline in domestic production. The allocation of subsidized foreign currency with a rate much lower than that of the market boosted imports rather than local production. That is, at least in part, to blame for last year’s recession,” he said.
Azarmand stressed that constant changes in foreign exchange market rules and regulations as well as the list of banned exports left exporters and producers confused.
“Under the circumstances, exports at rates higher than those in the domestic market could have helped production and prolonged the survival of domestic manufacturers. They were deprived of this opportunity, thanks to export bans and restrictions,” he said.
It should also be noted that the great surge in food imports came when the government was denouncing the US banking restrictions, saying they blocked Iran’s access to foreign banks and prevented Iran from importing food and pharmaceuticals. But when food imports were rising by more than a fifth, Iranian importers obviously didn’t have any problem with US banking restrictions.
