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Abu Dhabi, UAETuesday 25 September 2018

Iran currency controls likely to add further pressure on economy, analysts say

Government unifies forex rate but market rate for dollar reaches record high

Iranians check the currency rate around an exchanges shop in Tehran. ABEDIN TAHERKENAREH/EPA
Iranians check the currency rate around an exchanges shop in Tehran. ABEDIN TAHERKENAREH/EPA

Iran’s government is taking measures to halt a slide in the country’s currency amid fears that the US administration may scupper an Iran deal struck under the Barack Obama reign.

Such a move will likely add more pressure to an economy battered by years of crippling sanctions, as the experience of countries like Egypt and Nigeria in recent years has shown and is likely to push up the cost of goods and services and deter investment.

The government, which uses a two-tier system to sell US dollars, said this week that it was unifying the two rates at a rate of 42,000 rials even as the currency traded in the unregulated market touched a record low of 60,000 rials, a 50 per cent plunge from a year ago.

Iran has blamed its foes for fuelling the crash of its currency, which has led to queues for dollars at currency traders as the government clamped down on illegal trading, Bloomberg reported. On Wednesday, police said they arrested 12 people selling currency illegally and identified a group running an online operation without a license, the semi-official Tasnim new agency reported.

In parliament on Tuesday, central bank Governor Valiollah Seif

said: “Enemies outside of our borders, in various different guises, are fueling this issue and are going to some effort to make conditions tougher for the

people.”

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But analysts pointed out that shoring up the rial is unviable, as the case of other countries that struggled until they were finally forced to devalue their currency has shown.

The experience of Egypt in the aftermath of the 2011 revolution when the government tried to prop up the value of the currency with its foreign reserves proved that it was unsustainable and led to a massive devaluation in November 2016 that shaved more than half the value of the currency in order for the country to get a $12 billion bailout from the IMF.

“Absent a major improvement in Iran’s political outlook, the unification of the country’s official and free market exchange rates at the 42,000 rials per US dollar level appears unsustainable,” said Andrine Skjelland, country risk analyst at BMI Research.

“Concerns over the fate of the nuclear deal and Iran’s future ability to integrate into the global economy continue to weigh on demand for the rial, and the authorities’ foreign exchange reserves would need to be deployed to prop up the currency at the new rate. While sizable, reserves are not inexhaustible, and anecdotal evidence suggests some concern regarding their liquidity.”

Nicholas Fitzroy, Middle East analyst at the Economist Intelligence Unit, said any devaluation of the currency was likely to push up inflation into double digits for the remainder of the year as import costs increase.

“At least in the short-term, it will further damage foreign investment prospects, owing to uncertainty over whether the authorities can prevent black-market trading and maintain the exchange rate,” Mr Fitzroy said.

“There could also be a negative impact on private sector growth, if the authorities sanction higher interest rates and capital controls in order to support the exchange rate.”

Iran’s economy got a boost from the nuclear deal it struck in 2016. Since 2014, the country has suspended parts of its nuclear development work and the United States and Europe responded by temporarily lifting some of the sanctions that have buckled Iran’s economy. That was followed by the Joint Comprehensive Plan of Action in 2015 that was reached between the five permanent members of the United Nations security council, China, Russia, the United Kingdom and France plus Germany and the European Union.

The lifting of sanctions led to a growth spurt which has since fizzled amid US President Donald Trump’s threats to walk away from the Iran deal and anti-government protests that erupted in a number of Iranian cities in late December and which continued into January of this year.

The International Monetary Fund said in October that Iran's economic growth was expected to slide to 3.5 per cent in 2017 from 12.5 per cent in 2016 but is expected to expand 3.8 per cent this year.

That may change however if the crisis deepens.

“The depreciation of rial has shown a deeply imbedded mistrust in the management of the country and its economy fuelled by the persistency of unemployment, lack of investment and the dominance of the oligarchy that consists of the security apparatus, and religious foundations which have never paid taxes but draw on resources from the public purse on a daily basis,” said Mehrdad Emadi, an economist at Beta Matrix, a research and consultancy firm.

“No matter how much of its limited foreign currency reserves the government has repapered to sacrifice and sustain the declared rate of 42,000 rial to the dollar, the market sentiments put rial at a much lower level.”

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