Iran Politics Report Thursday, June 14, 2018
Dollar rate keeps soaring in Iran, while no improvement is foreseeable in the political arena to put a stop to it!
The prices of gold and cars and the exchange rate for the U.S. dollar reached record highs on the Iranian market on June 11, while some social media users have complained about a new rise in the cost of housing in Tehran.
Each dollar was traded for 69,000 rials on June 11, while buyers could purchase a dollar against 67,300 rials the previous day, traders reported on the messaging service Telegram, which is accessible through proxy. Three days later on June 14, the dollar is exchanged at 71,000 rials through alternative and risky channels.
The price of one standard gold coin was higher than 25 million rials on the Tehran market on June 11, marking a 4 million rial rise in comparison with the price last week. The price currently stands at 26 million rials.
The price of various models of cars has risen between 20 million and 400 million rials over the past 10 days, while the buyers have to pay up to 100 million rials more if they intend to buy the cars from the free market.
At the same time, several social media users have complained about price hikes on the housing market that have “made buying or renting a house or a flat unaffordable for most people,” as one person tweeted.
The Iranian government attempted to force the rate of 42,000 rials per U.S. dollar after the exchange rate surpassed 60,000 rials on April 10. Nevertheless, the price of the dollar and other foreign currencies has been on an unusual rise since March.
The Iranian Students News Agency (ISNA) wrote in a commentary on June 11, “It is time for the government to change its foreign exchange policy and recognize the market price.”
Forex market analyst Kambiz Afsari told reporters that U.S. sanctions against Iran and some European companies’ reluctance to trade with Iran may have affected the exchange rate on the Iranian market.
Following the United States’ pullout from the nuclear deal with Iran, it has given European companies six months to leave the Iranian market.
Economic analyst Ahmad Alavi told Radio Farda that the increase in the exchange rate and the prices of some goods should be attributed to rising inflation in Iran, which is due to government inefficiency and irregularities in its budget.
Iranian jewelers’ association chief Mohammad Keshtiaray told ISNA there has been no rise in the price of gold on the global market, and the price hype in Iran has other economic reasons such as the rise in demand.
Many Iranians have started investing in gold after several financial institutions failed to deliver the interest they had promised to pay their customers.
Moderate news website Asr Iran reported on June 11 that there has been a hike in prices of household appliances and cars in the past 10 days.
According to Asr Iran, the rise between 20 million and 400 million rials in the price of cars is due to foreign car manufacturers leaving Iran.
The website reported that Peugeot, Citroen, and Hyundai are among the car manufacturers that have already left the country. Meanwhile, some other manufacturers have limited their output, and this has led to a further rise in prices.
Iranian Industry Minister Mojtaba Khosrowtaj told reporters that he “did not have enough time to probe the rise in the price of cars.”
Earlier, the head of the car imports association told the press that few importers had managed to get the foreign currency they needed at the prices set by the government.
The news agency of the Iranian Parliament (ICANA) reported on June 11 that Japanese car manufacturer Mazda has also left Iran.
ICANA quoted MP Vali Maleki as saying that car manufacturers’ have bigger financial interests in the United States and they would not jeopardize those interests by continuing their presence on the Iranian market.
Who enjoys high dollar prices?
Iran’s reformist Sharq newspaper reports that with the limited distribution of the imposed 42,000 rial exchange rate for dollar, numerous businessmen inside Iran do not have access to the official rate dollar. On the other hand, the current situation seems to be attracting too many others as they have decided to increase their imports with the imposed 42,000 rial rate. The import rate has experienced a 66% increase in comparison to the previous year’s spring.
During the first two months of the spring, $12 billion worth of imports were registered in Iran’s costumes. The number has risen to $20 billion this year.
Experts consider the trend as a negative one and believe that the dramatic increase comes as a result of the dual exchange rate. They warn that the current financial policy has made it even more difficult to distinguish authentic and unauthentic imports.
A certain importers have access to the 42,000 rials dollar and enjoy spending the money on import of products that do not lead to efficient productivity. What further acts as a blow to the economy, is that the privileged importers who imported the products with the officially imposed rate would eventually sell the same products at the unofficial over 70,000 rial rate, leading to a widespread increase in prices in general.
In an interview with Sharq, economist Hadi Mousavi-nik estimated that every 10% increase in dollar rate leads to 2% increase in inflation.
“When an economy experiences two different exchange rates with the one dedicated to import (for certain individuals) a lot lower than that in the market, the demand for import builds up,”
said Ali Divandari, the head of Iran’s Monetary and Banking Research Institute Divandari further urges the presence of a mechanism that impedes excessive imports.
Iranian government’s passive policy
According to economic theories, countries have to put organizing export and reducing imports on top of their economic agenda. Statistics indicate that an opposite trend is happening inside Iran.
The current imposed rate reduces the demand for export and encourages import. Economist Hadi
Mousavi-nik argues that not taking steps to normalize the current 28,000 rials gap between government’s imposed dollar rate and the one being exchanged in the market leads to importers’
utmost efforts in order to access the official rate through certain illegal channels further complicating the country’s economic situation.
Iran’s futile efforts to normalize the exchange rate gap
Al-monitor reports that on April 10, Iranian authorities announced a policy of unification of exchange rates, a move that has generated confusion, especially among those economic players who relied on the country’s free currency market. The fact is that the newly unified rate of 42,000 rials to the US dollar is not yet widely available. At best, it is only available to those importers who had access to the so-called forex chamber rate, which was previously at about 37,000 rials to the greenback.
As such, this equates to an actual devaluation of the national currency. In line with returning calm to the market, one of the most recent steps by the Central Bank of Iran (CBI) has been to expand an already existing online system referred to by its Persian acronym NIMA (Integrated System for Hard Currency Transactions). The question is whether NIMA will succeed in addressing the needs of the Iranian economy.
Mousavi asserts that NIMA cannot distinguish genuine or excessive demands for imports it originally is not distinguishable. The only way is to come up with a policy that does not encourage importers to place too many orders. Mousavi-Nik predicted that Iran will experience a two digit inflation in the upcoming months as it has been unable to implement a policy that puts a check on the progressive exchange rates.
Virtually all analysts and observers know that the process of unifying exchange rates will be a difficult one, especially because a number of economic actors used the previous two-tiered foreign exchange system to engage in corrupt dealings. Therefore, the introduction of NIMA is not just based on the country’s economic needs and its international obligations to fight money laundering, but also reflects a desire to undermine corrupt practices that have empowered institutions ingrained in the so-called deep state in Iran. In fact, money laundering activity in the country is estimated to have been $26 billion in the past Iranian year.
One can imagine that powerful players will push back against NIMA and still carve out a space for their illegal activities. That is why at the end of the day, flawless implementation of NIMA should be the top priority.
Having experienced the rate fluctuations of the past year, Iranian officials need to acknowledge that they have had severe regulatory weaknesses in managing the financial sector. One can see this in the continued operation of unlicensed financial institutions. Therefore, any new effort to
induce stability into the market needs to be accompanied by clear administrative and supervisory structures, both to prevent new channels of corruption and also to be prepared for sudden demand hikes. In a first assessment, the push for transparency is positive, but NIMA seems ill- prepared to manage the complexities of the Iranian currency market.
That is why the CBI would be best advised to declare a phased approach to the process, allow the free market to operate within clear boundaries and gradually turn NIMA into a powerful and comprehensive platform. If the phased approach is implemented successfully, NIMA could regulate the currency market, put an end to many rent-seeking activities and stop a number of corrupt practices that have plagued the Iranian economy.
Rouhani ordered relevant organizations to work toward lessening the prices.
Mahmoud Vaezi, the Chief of Staff of President Rouhani, said the issue of soaring prices across Iran has been raised and seriously explored during cabinet meetings.
Rouhani is expected to hold a special meeting with his cabinet ministers on the issue on Monday, Vaezi was quoted as saying in a report by Donya-ye Eqtesad.
According to Vaezi, during the upcoming meeting, the top officials will explore the current satiation and make a final decision to put an end to the price hikes.
He went on to say that certain organizations which receive US dollars at the governmental price of 42,000 rials don’t have proper control over the pricing process.
“The president has urged all relevant organizations to step into the fray and contribute to efforts to control the soaring prices,” he said.
Vaezi also said all goods reserved in the stores should be distributed among people and added the car manufacturers should sell their products based on the fixed prices.
Rouhani associate’s hiking prices to enemies’ psychological warfare
In his most recent remark President Hassan Rouhani linked the fluctuation in the country’s market prices to a psychological war waged by the enemies, calling for concerted action to foil that plot.
According to Tasnim news agency, in a meeting with a group of Iranian journalists and media activists in Tehran on Wednesday evening, Rouhani said the real problem the county is now facing is the ongoing “psychological warfare” not the economic, cultural or security challenges.
Denouncing the foreign news sources that foment disappointment in Iran and mislead the public opinion, Rouhani said all Iranians should join hands to fight the enemy’s psychological war.
He also said that the volatility of the gold, automobile and foreign currency markets in Iran is rooted in the psychological war rather than in real economic realities.
The president then took a swipe at Donald Trump administration’s hostile policies against Iran, saying although all US administrations have been enemies of Iran, the incumbent president is
“worse, more vicious, and with more evil plots” than his predecessors.
Scott Lucas an EAWorld View contributor argues that the recent fall of Iran’s currency indicates the failure of the latest measures, which have included raising of interest rates on savings, a change from the dollar to the Euro as the official recording currency, and detentions of unofficial currency traders.
