Currency in Commotion
by ALI CHENAR in Tehran
04 Oct 2010 22:21
[ business ] The Iranian currency market is a volatile arena these days. The Iranian rial has been losing value while the U.S. dollar, euro, and British pound have all been gaining. Last Thursday, the rial recouped some of its lost worth and the Iranian working week ended with one U.S. dollar valued at 11,000 rials in the market and 10,198 rials according to the Central Bank of Iran (CBI). As of Monday, the market value was around 10,900 rials, not far from the CBI's short-term target of 10,700. Still, many observers agree that the market is far from stabilized. Their consensus ends and disagreement on the causes of the recent dive begins. Some blame sanctions, others believe the rial is overvalued, and a few hold that the government is simulating the consequences of a devaluation of the rial. "But on the other hand..." The one-armed economist for whom former U.S. President Harry Truman searched in vain has yet to turn up in Iran either.
During the past decade, the Iranian economy has experienced a relatively stable currency market, with the rial pegged to the U.S. dollar and demonstrating little variation. The growth in oil revenues and government foreign currency reserves has helped the CBI to keep the market under control. Surprisingly, despite the global financial crisis and the threat of worldwide depression, the exchange rate changed little in Iran and the market remained stable. Was this helpful for the Iranian economy?
It does not seem so. The pegging system kept the exchange rate fixed and did not permit Iran's markets to reflect global events. The outcome was disastrous for the Iranian industrial and manufacturing sectors as the rial became stronger and artificially more expensive. Imports soared. According to the Islamic Republic of Iran Customs Authority (IRICA) website, in 2007 alone, 48 billion dollars worth of goods were imported, 11 billion of that from the United Arab Emirates. (IRICA has not made public import statistics for the years since 2007.) This represents more than a doubling of imports in a half-decade. Only five years earlier, according to the same source, the official import value came to just 22 billion dollars.
And even the 48 billion-dollar figure is an underestimation. It is common knowledge that a large portion of imported goods enter the country via unofficial routes and are not registered. Even the conservative, pro-regime newspapers complain of the rampant growth of unregulated imports. In early September, Aftab reported that 750,000 farmers had lost their jobs in the last five years due to the drastic import rise.
When President Mahmoud Ahmadinejad's administration announced its decision to eliminate price subsidies for staple commodities, critics of the government were quick to point out that such a step would be disastrous without a complementary adjustment of the import-favoring exchange rate. Many Iranian economists called for a devaluation of the rial so domestic producers would be able to survive the liberalization period. Ahmadinejad has turned a deaf ear to the economists' advice.
It is true that in Iran the exchange rate is not just an economic index, but also a matter of national pride. Governments boast of stability in the currency market as a sign of their success. Devaluation is more than an economic act, it is a matter of high politics involving the prestige and popularity of the regime. Those familiar with the history of the Iranian economy will recall the difficulties faced by previous administrations, such as that of President Ali Akbar Hashemi Rafsanjani in the early 1990s, in dealing with the nation's currency market.
Like all other economic matters, the exchange rate is also an issue of interests. A strong rial backed by oil revenues has made the import business a lucrative one for many politically well-connected concerns. They will hardly welcome a devaluation of the rial in the name of national pride. The government's reluctance to allow the official value of the rial to better reflect the state of the market may result more from the power struggle between the importers' and exporters' respective lobbying efforts than inveterately poor economic judgment.
The international economic sanctions that have been imposed on Iran may have played the triggering role in this episode -- specifically, in how they have affected transactions with the UAE, Iran's most significant trade partner and home to the largest number of Iranian businesses abroad. A number of businesses exchange their dollars in the UAE for rials in Tehran, and the timing of banking procedures is vital in keeping this segment of the market stable. Sanctions have discouraged several UAE-sited banks from working with Iranian businesses. An interruption in normal banking processes was inevitable. When the UAE restricted the Dubai branch of Iran's Bank Saderat, a major nexus of rial transactions, from making such wire transfers last week, there was a sudden increase in demand for domestic sources of hard currency, the supply of which was further disrupted by the strikes in the Tehran bazaar. Jewelers in the bazaar usually buy and sell both gold coins and hard currency. Their strike meant a further constriction of exchange venues. The result was a diving rial.
It seems the increased volatility alarmed many decision makers within the Iranian regime. The CBI rallied to stabilize gold as well as currency by raising the flow of both into the market. Government officials have vowed to bring the market exchange rate down to 10,600 rials per U.S. dollar. The coming weeks will prove the feasibility of the target, which seems to be politically motivated and at the same time insensitive to the realities of the national economy. Should liberalization come, this would be a rate very difficult to maintain.
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