Iran Lawmakers Reject Government Plan To Slash Food Subsidy

The decision can add to the government’s huge budget deficit as United States sanctions impede full capacity oil exports and international trade.

The committee's spokesman, Rahim Zare, told reporters Saturday that the committee did not approve the reform because the draft budget bill was ambiguous, and the government has not provided a written proposal to explain how it will make up for the removal of subsidized dollar.

The subsidized rate which is usually referred to as the "preferential rate", was introduced by the administration of President Hassan Rouhani when the national currency began to lose value in early 2018 and food prices began to climb. The cheap dollars are provided to importers at 42,000 rials, instead of the current free market rate of around 280,000 rials to one US dollar.

The government has spent a minimum of $8 billion a year since April 2018 to finance subsidized essential imports. The subsidy weighs heavily on Iran’s depleted reserves.

Eliminating the “cheap dollar’ subsidy would raise prices of essential goods by five to six times, economists and critics have said, but would also help make up for some of the huge budget deficit the government faces amid US sanctions.

The ad hoc administrative budget bill review committee known as Talfiq (Reconciliation) Committee, consists of members of the Planning, Budget, and Auditing Committee, and representatives of other committees. The committee presents its report on the bill to the parliament for further considerations and assessment.

Zare said the committee has decided to allocate $9b at the 42,000 rial rate to importing medicine, medical equipment and other essential goods excluding wheat. Instead, the committee has decided to allocate a budget to increase the purchase price of wheat paid to domestic farmers.

In the current year, according to Zare, the government has spent around $15b for importing essential goods. This is far higher than figures mentioned by officials in previous years.

The parliament in November delayed a bill to amend the current fiscal year's budget law (ending March 20) that would have replaced the subsidy with monthly cash handouts of 1.1 million rials (less than $4) to 60 million low-income Iranians. This meant the government should resort to inflationary measures, such as borrowing from the Central Bank, to remedy the current year's budget deficit this year.

The committee has also rejected the government's request to be allowed to slash the amount it is required to pay the National Development Fund (NDF) from oil sales by half to finance its budget next year. According to the NDF charter, 40 percent of oil revenues should be saved by the government in the fund for investment on productive economic activities that would guarantee the welfare of future generations. NFD is a sovereign wealth fund.

Zare said the committee rejected the proposal because the government did not have the Supreme Leader Ali Khamenei’s authorization to cut back its 40 percent contribution to the NDF but the proposal can be reconsidered if the government acquires such permission before the budget bill's final ratification by the parliament.

A possible agreement in the Vienna nuclear talks and reduction of US sanctions could go a long way to help the government to overcome its financial woes by increasing revenues from oil exports. In recent days, there has also been talk of unfreezing billions of dollars of assets in South Korea and other countries including Iraq.

President Ebrahim Raisi's presented his budget bill for the next Iranian calendar and fiscal year (beginning March 21) on December 12. He told the parliament that the reform was a pivotal element of the bill. The bill estimated oil exports of 1.2 million barrels per day at an average price of $60. Iran has increased its illicit oil exports since early 2021 because of apparently less vigorous enforcement by the Biden Administration.