Iran signals change to FX regime, crackdown on profiteering

Hours before the United States designated the Islamic Revolutionary Guard Corps (IRGC) a Foreign Terrorist Organization (FTO) on April 9, worries about renewed economic pressure sparked a fresh plunge in the value of Iran’s national currency. In a matter of 24 hours, the rial lost around 7.5% of its value. Hovering near 145,000 rials against the greenback, worries were fueled of yet another wave of inflation. Many ordinary Iranians, whose purchasing power has dwindled in the past 14 months, once again rushed to money changers and quickly formed long queues in central Tehran.

But the governor of the Central Bank of Iran promptly moved to ease such concerns, assuring the public that the new jump would not last long. According to Abdolnasser Hemmati, the US measure to brand the IRGC as an FTO would be of "no fundamental economic impact" and the Central Bank was closely watching the market. "What has created the turbulence these days is only a psychological factor," Hemmati added.

On April 10 — a day after those comments — relative calm seemed to return. The rial's sharp nosedive stopped, and a prompt reversal to around the rates before the FTO designation of the IRGC was seen. At close of business, the greenback traded for 137,500 rials.

However, what still remains a concern as admitted by Hemmati is the hard currency Iran expects to repatriate from its non-oil exports. Official figures indicate that the country retrieved only 25% of its non-oil exports in the period between March 2018 and February 2019. "If the government and the Central Bank fail to tackle this fundamental threat, more turbulence in the currency market is likely," Hemmati warned.

The government is also rethinking its current multi-tier exchange rate regime, which subsidizes foreign exchange to importers of essential goods at the official rate of 42,000 rials per US dollar — less than one-third of that on the open market. The aim of this policy, which was instituted in April 2018, has been to shield the lower social classes from rises in the prices of 25 basic commodities, which have nonetheless jumped.

One year on, the Rouhani administration is now thinking twice. "We have to admit that the current approach is not working," said Mohammad Bagher Nobakht, head of the Planning and Budget Organization. According to the veteran economist, the current subsidy of foreign exchange is not being abolished, but overhauled, as government assistance to those in need has not trickled down the way it was originally envisaged. To make up for this, Nobakht said, “electronic coupons” — digital food stamps — could be one option. The first victim in the list of commodities to be slashed from access to the official exchange rate is meat, whose prices have been skyrocketing in the past two months amid widespread rampant profiteering and smuggling of the product out of the country. The Rouhani administration’s decision to reconsider its preferential provision of subsidized foreign currency was seen as a "retreat" by economic daily Jahan Sanat. Ever since the scheme was implemented last year, it has met relentless criticism from experts. Meanwhile, reports have repeatedly emerged of fraud and embezzlement by those granted access to cheap foreign currency. In one instance, young Minister of Information and Communications Technology Mohammad Javad Azari Jahromi blew the whistle on cellphone importers who had reportedly gotten access to official rate currency but either not used it for imports or bought products and then sold them for several times the price at the open market rate.

In this vein, selective access to the official exchange rate has, according to Iranian economic expert Pouya Nazeran, helped corrupt networks “turn into billionaires overnight" and further widened the gap between rich and poor. Some are even demanding that the provision of cheap hard currency to some importers be entirely aborted rather than revised. In an editorial April 10, leading business news daily Donya-e-Eqtesad advised the government to do so because its efforts have not put a brake on inflation, concluding, "The subsidies merely meet the interests of privileged and corrupt profit-seekers."