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Dispatch | Mounting Economic Challenges Force New Monetary Moves

by ALI CHENAR

08 Feb 2012 20:15Comments
N1013565-1797921.jpg"The economy is finished," says one south Tehrani.

[ business ] To stabilize the reeling Iranian economy, the government is creating parallel markets, promoting new market instruments, and forcing businesses to accept government-set prices. The adoption of these policies, however, have not silenced critics of the Ahmadinejad administration and its economic performance. Recent statements by cabinet ministers and the government's release of its annual budget proposal have raised eyebrows and new questions.

On January 25, after weeks of hesitation, President Mahmoud Ahmadinejad finally agreed to raise interest rates on bank deposits. Last week, Iran's Council for Money and Credit announced that financial institutions could set their rates competitively: "Banks should set the annual interest rates for their time deposits, general bonds, and special accounts for the duration of such accounts." The announcement was celebrated by many who saw it as a major step toward accepting free-market principles in the financial sector and giving banks more decision-making autonomy. This was not to last.

Just one day after the council's announcement, Minister of Economic Affairs and Finance Seyyed Shamseddin Hosseini publicly declared, "Interest rates have a ceiling in Iran and banks can not set interest rates beyond the government accepted ceiling." According to IRNA, the state news agency, he also criticized banks for offering higher interest rates to potential clients. While Hosseini is the government's point man for economic policy, he does not preside over the Council for Money and Credit, whose chair is Mahmoud Bahmani, governor of the Central Bank of Iran (CBI). It seems the rift between the government's monetary and fiscal teams continues to produce mixed messages and outright conflict.

The CBI next focused on the precious metal market. It began advance sales of gold coins, issuing certificates that entitle a buyer to receive a Bahar-e Azadi coin after four or six months. According to the Donya-ye Eghtesad daily, the CBI absorbed 4.8 trillion rials in the last six weeks by selling 8.3 million such certificates. Estimating 330 trillion rials in circulation, economic analysts believe the CBI has been able to collect 1.5 percent of this liquidity. The purpose of the certificates, which have a guaranteed interest rate of 20 percent and can be traded in the stock exchanges in Tehran and other major cities, is to offer a parallel market for Iranian households to invest their cash in and, it is hoped, prevent another bubble in the currency market. But now many ask what will happen when, a few months from now, the CBI injects 8.3 million gold coins into Iran's precious metal market.

The measure has received a warm welcome from the financial sector and a skeptical reception from others. Amir, who worked in the financial sector and is now pursuing a graduate degree in management, says, "This is just another way of taxing people through inflation and taking away their cash." He believes that the "government has many fiscal challenges and its coffers are empty. It is trying to get much needed cash for its functions." Amir represents many conspiracy theory-loving Iranians who see a devious plot behind the government's every move. This time, however, the claim is not without substance -- the government shows every sign of facing major "fiscal challenges."

The Ahmadinejad administration had previously announced its plan to end cash handouts, intended to replace subsidies on household food and energy that were slashed last year, to millions of Iranians. On the anniversary of the implementation of sweeping subsidy reforms, Behrouz Moradi, director-general of the Organization for Targeted Subsidies, declared that the government would contact ten million individuals with annual incomes over 30 million rials via mail and ask them to withdraw voluntarily from the cash handout program. He told reporters, "This way the government will be able to help low-income families more efficiently." Many have interpreted this as an obvious sign of growing fiscal pressures.

The government's budget for the next fiscal year is another source of concern. As has been his habit, Ahmadinejad submitted his budget to the Majles for approval after a long delay -- two months, this time. He called it a "contractionary budget" that trims public spending by 6.5 percent. It assumes a crude oil price of $85 a barrel and sets the official exchange rate at 12,000 rials per dollar. Although the government's supporters have lauded the budget as a step toward responsible spending, others beg to differ.

Majles deputy Ahmad Tavakoli, head of the parliament's research center, told reporters that he is astonished by the budget's disorganization. He pointed out that the government had neglected to reveal its revenue sources and offered only vague estimates of its expenditures. A Donya-ye Eghtesad editorial states, "Although the government calls this a contractionary budget, it is interesting to notice an increase of 11.7 percent in public firms' budgets." The observation is particularly noteworthy in light of the wave of privatization of public entities that has been carried out in recent years. Another disturbing fact is that the only numbers publicly announced by the government, the development budget and expenditures, show 12.8 and 23 percent increases. One legislator asked the obvious: "How could the budget be 6.5 percent smaller when everything we know about it is actually more than last year?" Parliament deputies know that they will still have an incomplete budget to approve and an uncooperative government to deal with when the Persian New Year arrives March 20. And they are not happy about it.

What does all these mean to the average Iranian? Vahid, a 28-year-old engineer who works as a project manager in south Tehran, sums up the mood: "There is no hope that the government can do anything. The economy is finished." Consumers are bracing for higher prices despite the announcement of government controls. Shopkeepers are already charging more for daily necessities and though law enforcement patrols of the bazaars have begun, it seems they cannot stop the tide.

Meanwhile, the regime is not stopping at anything in its attempt to regain control over the economy and the economic discourse. The administrator of Mesghal.com has been arrested for "disturbing and distorting" the nation's monetary activity. Mesghal covers the currency exchange market, and as the rial was losing value many referred to it instead of banks' webpages to find out the true open-market rates. Ayatollah Sadegh Larijani, the head of the Iranian judiciary, has promised to punish those who disturbed the economy most severely, even threatening them with the death penalty. It is not easy for ordinary Iranians to look to the coming spring without some pessimism.

Copyright © 2012 Tehran Bureau

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