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Business | Iran's Economy: Déjà Vu All Over Again

by ALI CHENAR in Tehran

27 Jan 2012 22:39Comments
13901101165637914_PhotoL.jpgAs the rial plummets, interest rates are hiked -- the latest step in a long tradition of economic trial and error.

[ dispatch ] The volatility of Iran's currency market over the past month has left consumers puzzled, politicians confused, and everybody guessing. The Ahmadinejad administration reacted slowly, finally committing this week to an increase in interest rates to prevent a bank run.

As the working week began in Iran this past Saturday, the rial declined sharply, falling to as low as 20,000 per U.S. dollar on the open market. This decline, although dramatic, was expected. The surprise took place in the precious metals market, where the price of one official Islamic Republic gold coin, the Bahar-e Azadi, reached ten million rials. Everything seemed to point at an economic disaster. Many currency exchange offices shut down, refusing to sell buyers any hard currency at all. Remarkably, the website of the Central Bank of Iran (CBI) still reports that the dollar is trading for 11,296 rials, even after CBI Governor Mahmoud Bahmani announced that the rial would be officially devalued to 12,260 per dollar.

In the meantime, President Mahmoud Ahmadinejad has accused his political rivals of being in tune with "foreign enemies." He told an audience in the southeastern city of Kerman, "This ugly political economic media game was a great treason.... Some plotted to disturb the market and to increase the price, so they could sell their dollars at higher rates." These unnamed individuals included "some who were sending text messages even on a holiday to say gold prices are rising." (The anniversary of the Prophet Muhammad's death was this past Monday.) He assured his audience, "Last year, the Central Bank and other banks saved 90 billion dollars; this year, oil revenues will be 90 billion dollars." According to Ahmadinejad, "Our economy does not have any problem." He and his administration are coming in for heavy criticism, nonetheless. An editorial in Thursday's edition of Tehran Emrouz asked, "What kind of economy could be disturbed by text messaging?" The editorial was headlined "You Are Not a Hero, You Were Asleep."

The economy continues to be at the center of the domestic debate. Last week, the Statistical Center of Iran (SCI) released data that showed growing unemployment and declining economic participation. An editorial in the Donya-e Eghtesad daily estimated the job loss at around 340,000. Others believe the actual figure is much worse. The Jahan Sana'at daily ran a story that claimed that Iran's economy has lost one million jobs since last year. According to the SCI, the unemployment rate averaged 13.9 percent in the past year. I have not met anyone who thinks that is an accurate estimate. A researcher with the University of Tehran says that the "SCI data does not include many categories of unemployment... It says unemployment has been increasing moderately; in reality, unemployment has increased markedly."

RialExchangeRateTable.jpg Government officials, meanwhile, appear set to continue the tradition of trial and error with Iran's economy. As the rial continued its decline from the beginning of the year, it was announced on January 15 that the Ahmadinejad administration had consented to increase the rate of return on bank deposits. Many in Iran's business community welcomed the new policy -- the president had long advocated lower interest rates and objected to any increase. But a few days later, it was announced that the plan to raise interest rates had been rejected. This sparked a rapid rise in gold prices and the rial declined even more precipitously. It was rumored that Bahmani told Ahmadinejad that he would continue as CBI governor if and only if he could raise interest rates. On Wednesday, the president finally, conclusively agreed. Two days earlier, the open-market exchange rate had closed at 21,000 rials per dollar, according to Mesghal.com (source of the exchange rate data in the accompanying table), and the Bahar-e Azadi had already hit the totemic ten million rials.

Some analysts are skeptical that the interest rate has anything to do with these shifts. A financial expert for one of Iran's many private banks told Tehran Bureau, "The money market is not a substitute for the gold or currency market. I do not believe increasing interest rates will calm either." Saeed, who has a small currency exchange shop in downtown Tehran, adds, "I do not see the relevance. It seems people have priced the dollar for the worst case scenario. Interest rates do not matter much when you do not think there will be a tomorrow." Neither believes that the market volatility has come to an end. "There is no buying and no selling," says Saeed.

It seems the administration's problems in this arena are far from over. Some recall the economic challenges faced by the Shah's regime in its final years: mounting urban unemployment, an economy dependent on imports, and a government that considered indices such as the exchange rate matters of national prestige. Others reject the comparison. A graduate student of economics in Tehran told me, "Both the Shah's regime and this government relied heavily on imports and both benefited from increased oil revenues, but the similarities end there. The Shah was not under sanctions, we are." That suggests the conundrum any student of Iran's present-day economy faces: what share of the problems is caused by the government's lack of economic foresight and what share is due to international sanctions. While one might be rectified domestically, what is to be done about the other?

Copyright © 2012 Tehran Bureau

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