TCCIMA Again Demands End to Forex Subsidy

(Wednesday, March 13, 2019) 08:16

Further to its persistent calls for transparency and doing away with the controversial subsidy schemes, Tehran Chamber of Commerce, Industries, Mines and Agricultures called on the government to unify the multiple currency rates, which it said has created a hotbed for corruption and rent-seeking.

At the last meeting of the TCCIMA board of representatives during the outgoing fiscal (ends March 20) on Tuesday, its president Masoud Khansari said multiple exchange rates are like oxygen for corruption. He once again appealed to the government to unify the exchange rates "as quickly as possible." 


Last year the government had said it is cognizant of the warnings by economists and businesses to get rid of subsidized forex. It pegged the USD  rate at 42,000 rials on the promise that it can meet all currency needs at that rate. 


However as demand for imports at the subsidized rate (which was way lower than the black market rate) shot up overnight, the government panicked only to admit that its latest forex move was futile and cannot deliver. 


It created different categories of goods that would be eligible for subsidized currency. One list included import of 25 basic goods that could get currency at preferential rates, another was for imports at the newly created rate called Nima. All unessential consumer goods were told to refer to the free market for their currency needs. 


Now businesses are complaining that the exchange rates have created more confusion for traders and given rise to rent-seeking due to the big fat profits forex arbitrage offers. 


Particularly controversial is the allocation of subsidized currency for basic goods including staples which critics say has done almost nothing to cushion the effects of price shocks that occurred in 2018 when the rial tanked.


This week the government said it has earmarked $14 billion for import of essential goods in 2019-20 fiscal budget. 


Governor of the Central Bank of Iran Abdolnaser Hemmati last week took stock of the inefficiency and visible futility of subsidized forex programs for importing essential goods. He said the dysfunctional distribution system was the main culprit.


Exercise in Futility

In an Instagram post, Hemmati admitted that because of shortcomings in the forex distribution system and lack of strong oversight the forex policy had failed to curb rising prices of most essential goods.


Economy Minister Farhad Dejpasand was the latest senior official on Tuesday to concur that the subsidized forex policy was indeed an exercise in futility. 


Businesses also complain that the layers of red tape for obtaining currency for imports have harmed the business landscape which also is visible in falling export rates.


The senior chamber official said it should be known “in unambiguous terms whether the five banks to be merged have any losses on their balance sheets. If so, the public should know how the losses will be covered


Khansari asked the government to also reform the energy subsidy system (estimated at 9,000 trillion rials annually) by giving subsidies in cash directly to the people.


He also called for transparency about the planned merger of five armed forces-affiliated banks with the government-owned Bank Sepah.


The senior business leader said it should be known in unambiguous terms whether or not the lenders to be merged have any losses on their balance sheets. “If so, the public should know how the losses will be covered.” 


"Will it be like the case of unlicensed credit institutions, where the money was paid from the people's pockets," Khansari asked.   


The Central Bank of Iran said earlier this month the merger of Bank Sepah with five banks and credit institutions affiliated to armed forces with Bank Sepah is in the making.  


"As part of efforts to centralize the capability and capacity of the entities, namely Ansar Bank, Bank Hekamt Iranian, Mehr Eqtesad Bank, Ghavamin Bank, and Kosar Credit Institution are being merged into one bank," the CBI said. 


According to President Hassan Rouhani, to reimburse depositors of insolvent money institutions in the recent past, the government had to come up with 350 trillion rials ($2.7 billion at today’s forex rates and almost $10b at the exchange rate of the time). 


Economic Freedom 

At a presentation on Tuesday, Ferial Mostofi, a TCCIMA board member and head of the Investment Attraction Commission Center of the Chamber talked about cooperation with Frazer Institute. 


According to the Canadian think-tank and research firm, Iran ranked 130th in the world in terms of economic freedom in 2018 with a total score of 6.03 out of 10 which shows an improvement by 19 ranks. 


Mostofi pointed to the Frazer report and said the study for Iran includes proposals for improvement which will be sent to government for consideration. 


As for the category of sound money, the main drawbacks for Iran are the surge in liquidity and galloping inflation. 


She went on to say that the Economic Freedom Index is prepared on principles such as freedom to trade internationally, sound money, legal system and property rights, size of government and regulations. 


The Frazer study said high tariffs, constantly-changing non-tariff barriers, obstacles to import-export rules, poor and inefficient export infrastructure (ports and transport systems) and inconsistency of the national politic-economic system with international economic rules are the main factors hurting freedom of trade for Iran. 


On the legal front, Frazer points to "lack of legal platform for the area of intellectual property" and "failure to provide means for the financial independence of the judiciary" and its transparency as the main challenges. 


When it comes to the government size, the main challenges are as follows: failed privatizations, increase in government's expenditures, lack of realization of funds for development projects and excessive demand of some entities for resources of the annual budget.