The Iranian economy

Iran set to introduce second official currency

Trade Arabia,

26 October, 2012

Direct look at why Iran wants to introduce a second currency exchange rate for imports, and what this means for the country.

The Central Bank of Iran is planning to introduce a 2nd official currency exchange rate for imports, Mehr news agency has recently reported. The new measure, which should be implemented within the next few weeks, has been approved by the government.

But why is this change necessary? Well, the new currency will aim to bring back stability to the volatile Iranian market. Earlier this month, the Iran rial plunged significantly against the US dollar in open market trade on Monday.

On Thursday 4th October, Currencies Direct revealed that the rial was trading at 34,200 for every $1, which was down from about 29,720 on Sunday 30th September. It was even trading at 24,600 during the previous week.

The currency's freefall has intensified the burdens on Iran's economy, as it is currently struggling with tough sanctions targeting oil exports and measures that are blocking it from key international banking networks. These sanctions were imposed upon Iran due to the country's continued development of its nuclear program.

But many accept that Western sanctions are not the only reason for the rial's sharp decline. Some have begun to blame governmental policies, such as fuelling inflation by increasing money supply while also artificially holding down inflation rates. This has encouraged many native Iranians to exchange their rials for foreign currency, as it is more likely to hold its value.

This economic unrest has led to riots in Tehran's main bazaar among the disillusioned merchant classes. The decreasing value of the rial and the rising prices has not only made staples, such as lamb and chicken, out of the reach of many low-income Iranians, but imports are also diminishing due to the poor exchange rates.

So while it may be difficult to tell at the moment, Currencies Direct will be paying attention to the developments in Iran to see whether the second currency exchange rate will benefit the ailing country.

Iran’s currency traders forced underground

FT,

26 October, 2012

Ahmad paces the street by his shuttered shop in Tehran, waiting for customers to call him on his mobile phone.

For 20 years, he has operated a small currency exchange in the downtown area of Iran’s capital. But earlier this month, state authorities sealed off his shop as part of a wider attempt to counter the sharp fall in the rial.

The 45-year-old now operates in secret, his daily trade slowed to a trickle. He is constantly alert to an impromptu visit by the police. “You can’t buy millions of dollars any more, but you can still purchase about $100,000,” he says.

Like many other currency traders, Ahmad’s business is a victim of high-stakes geopolitics as much as domestic economic mismanagement. That combination led to the plunge in the value of the rial this month, and drove the police to close down most currency exchanges. Ahmad is lucky that he has not been arrested.

The move by the authorities curbed market fluctuations and has helped the central bank to limit the foreign exchange market to about two dozen currency exchange shops in Tehran.

These operate under central bank licence and sell only limited amounts of hard currencies at rates just below the black market.

One US dollar now buys about 31,000 rials on the black market and 30,000 in licensed shops, while the official rate remains at 12,260. Before the crackdown, the rial was selling at about 40,000 on the open market.

Ahmad, who asked for his real name not to be used, says he knows of at least 50 other traders who have faced closure in the main centre of the currency market on Ferdowsi and Jomhuri-Eslami streets in central Tehran.

Like him, however, many are still doing some business, and are sought after by Iranian businessmen and ordinary people in need of hard currency.

Ahmad says the main reason behind the market crackdown is the international campaign of sanctions on Iran, which is aimed at persuading Tehran to curb its nuclear programme.

He says the shortage of hard currency is due to shrinking oil revenues following the EU oil embargo in force in July, as well as mounting obstacles to the transfer of foreign exchange income into the country because of US banking sanctions.

“When the police intervene,” he says, “it means there is shortage of hard currency and the market has got out of control.”

Ahmad also blames domestic factors for exacerbating the currency problems. He points to “some political hands in the market”, which exploit the sanctions and engineer deliberate depreciation of the national currency to boost their rial income.

Iran’s currency troubles have accentuated tensions between President Mahmoud Ahmadi-Nejad and a generally hostile parliament.

Iran rial

Mr Ahmadi-Nejad has accused speculators of being behind the rial’s sharp decline.

Iran’s parliamentarians, however, have accused the government of not only failing to curb the currency market but also of selling hard currency at higher rates in order to fund its populist policies.

Iran’s parliament this week revised the budget law to prevent any such exploitation and banned the government from using the differences between official and market currency rates to meet its rial expenditures. The government denies the allegations.

Despite the unprecedented economic pressure, the Islamic regime insists the country is still able to withstand sanctions and will not halt its nuclear programme under any condition.

“As long as the [political and economic] conditions remain like this and sanctions continue, we will not be allowed to open our shops,” says Ahmad. “It is not possible to go back to normality in the foreseeable future.”

The risks associated with transactions to overseas recipients – whether businessmen or relatives – have also increased sharply, he says, because many currency dealers outside the country who are linked to Tehran dealers have gone bankrupt due to rial fluctuations.

“They do not admit bankruptcy, but we know that is why some big transactions disappear.”

Despite the risks, Ahmad still uses hawala – an old financial transfer system. It relies on trusted intermediaries to skip the conventional banking system, through which no money can be transferred due to sanctions. He sends his hawalas to Turkey, which he thinks is a safer route than Dubai where, he says, an increasing number of transactions are going missing.

Ahmad says demands for hawala have decreased amid the deteriorating economy. The fall in the purchasing power of many families means they are less able to travel abroad or support their children's’ education overseas.

“Many families who used to buy hard currencies from us now tell their children to either come back from Malaysia, Australia and Europe or earn your own money if you wish to stay,” he says.

“A family which used to transfer £5,000 once in a while now can send £1,000, or a family which used to buy [Malaysia’s] ringgit at 2,200 rials cannot afford ringgit at 12,000 rials now.”

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