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Business | Iran's Economy: A Ball Rolling Downhill

by BUSINESS CORRESPONDENT

17 Oct 2012 21:32Comments
873377_orig.jpg Businesses endangered by frozen foreign-exchange market, new government rules.

[ dispatch ] After the crisis in Iran's currency market two weeks ago and the accompanying street protests, there was a spate of articles on the Iranian economy in the Western media. Now that media interest has settled back down, it might be thought that the government has the situation under control. That would be wrong. The ball keeps rolling.

Before currency trading was halted on "Black Wednesday," the market value of a dollar had been around 37,000 rials, briefly hitting 40,000. Currency traders were allowed to reopen when a lower rate was imposed by the government on October 6, with a pledge of strict enforcement. Now, the market is open, but silent.

"No one buys or sells," Reza, who sells mobile phones in Tehran, told Tehran Bureau. "The currency rate is set to 28,500 rials per U.S. dollar; however, you cannot find any cash for that price."

Most of the websites that report the currency rates in Iran show virtually empty tables for market prices. All of them display the Central Bank of Iran's official rate, 12,260 rials per dollar; the rest is barren (see, for instance, mesghal.com). There are not even market prices for the Iraqi dinar or Emirati dirham, both normally in high demand because of Iranian tourism. One Iranian economist has stated, "There is no exchange rate, because we do not have a market anymore." A comprehensive market failure appears to have taken place, and in the absence of a market, bureaucrats have stepped forward to assume its functions.

In recent days, the Ahmadinejad administration has been busy issuing edicts. It allocated a portion of its hard currency reserves to importing essentials. It has introduced a multirate system, with one rate for essential imports, one for other imports, and a third for travelers. The outcome has been a situation rich with rent-seeking opportunities for businesses and individuals closely connected to the establishment. For example, tickets for foreign airlines are sold at the official exchange rate, meaning that a round ticket to any European destination costs about a third of its true market value. However, Iranian airlines have been told to buy the currency they need in the open market, wildly increasing their real cost of operations. The Association of Iranian Airlines (AIRA) has announced that if the government does not provide them with hard currency at the official exchange rate, the Iranian commercial aviation industry will cease to exist. Other business groups are also campaigning for access to the Central Bank's currency reserves.

Mohammad Nahavandian, head of Iran's Chamber of Commerce, Industries, and Mines, told reporters that in his opinion the administration had abandoned the currency market. Meanwhile, Mojtaba Farahani, an official with the Consumer Protection Agency, has warned Iranian importers that "the government will severely punish any importer who increases the price of his products or commodities." Commerce Minister Mehdi Ghazanfari has called on the authorities to deal with those businesses that "received hard currency at the official rate three months ago and now are selling it in the parallel markets to make huge profits."

"These businesses have no right to increase their prices," he told reporters.

In Reza's view, "No one can import or export anything under these circumstances." Hassan, a construction foreman, went to the bazaar last week to buy sandbags. He found the experience frustrating. "The merchant told me he cannot sell me anything because he does not know how much the dollar is!" According to Reza, "The fact of life for Iranian businesses is what you sell today is what you can buy tomorrow." Given the economic uncertainties, business owners consider increasing their prices a matter of survival and not profiteering.

Over the past two weeks, the government has spent more time on the blame game than on fixing the problem. According to Iran News Network (INN), in a debate held at the University of Shiraz, a pro-government faculty member, Abdol Reza Davari, blamed the currency crisis on falling oil revenues (something Iran's representative to OPEC denies) and on international sanctions. His adversary, Majles deputy Jafar Ghaderi, who serves as vice chairman of the parliament's Budget and Planning Commission, accused the administration of "mismanagement" and "lack of fiscal discipline." He said that Ahmadinejad and his ministers had not executed economic legislation enacted by the Majles, encouraged imports at an extravagant level, and wasted precious resources. He also described the executive branch as rife with corruption.

Ghaderi's critique is hardly uncommon. One hundred and two Majles deputies have signed a petition to summon Ahmadinejad to parliament to explain his actions and policies. They accuse the government of manipulating the exchange rate in order to pay for the monthly cash stipend it remits to many Iranian households to offset higher prices resulting from its subsidy reform program.

Naturally, the administration takes a different line, one echoed by Davari at the Shiraz debate. "Sixteen people," he claimed, "collected the 200 million dollars the government injected in the market daily." Neither he nor any administration official has yet explained how 16 people could have come up with six trillion rials in cash each day to purchase those dollars.

The political dispute holds little interest to a business community fighting for its survival. For Reza and other merchants, the question is if the situation will reverse in time for them to stay in business.

Reza put it bluntly, "We feel the pain of what other people consider the news."

Copyright © 2012 Tehran Bureau

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