Iran Economy News After currency crash, more worries for Iranian economy

After currency crash, more worries for Iranian economy

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Washington Post: President Mahmoud Ahmadinejad’s government, already faced with growing opposition from competing political forces within Iran, is confronting new pressure brought on by severe economic problems, including some triggered by international sanctions.

The Washington Post

By Thomas Erdbrink
Wednesday, October 6, 2010; A11

TEHRAN – President Mahmoud Ahmadinejad’s government, already faced with growing opposition from competing political forces within Iran, is confronting new pressure brought on by severe economic problems, including some triggered by international sanctions.

The sanctions, intended to push the country to abandon its nuclear program, are not yet crippling the Islamic Republic, economists and analysts say. But they are causing prices to rise and making it increasingly difficult for Iranian companies to work internationally.

U.S. officials have noted recently that the sanctions are having an impact, and also acknowledged the confluence of challenges. “This all comes at a time when Iran is especially vulnerable because of its government’s economic mismanagement and narrowed political flexibility,” Stuart Levey, a senior U.S. Treasury official, said in a Sept. 20 speech.

“We are already receiving reports that the regime is quite worried about the impact of these measures, especially on their banking system and on the prospects for economic growth,” Levey said. “And, as pressure increases, so has internal criticism of Ahmadinejad and others for failing to prepare adequately for international sanctions and for underestimating their effect.”

The sanctions are taking hold as Iran prepares to implement a major overhaul of how its state subsidies are distributed, giving direct payments to the poor while allowing prices of basic commodities such a bread, electricity and gasoline to rise by large percentages.

The confluence of the sanctions, concerns over the subsidy redistribution and possible budgetary problems have made the Iranian economy extremely fragile, as was apparent Sept. 25, when Iran’s currency, the rial, took a deep dive.

Following fresh financial sanctions from the United Arab Emirates, the Islamic Republic’s Central Bank did not intervene as the rial – stable for over a decade – plummeted by 15 percent, leaving traders and importers with evaporating bank accounts.

It’s not clear whether the Iranian government was caught by surprise by the impact of the U.A.E. measures or deliberately hesitated. But it waited a full week before starting to sell its petrodollars, trading them at a considerably higher rate than it would have received a week before and making a profit on the sales.

The absence of well-defined policies to address these fundamental issues is making economists, businessmen and some officials increasingly nervous.

“It is a little bit difficult to see a clear economic strategy from the government,” said Mohammad Nahavandian, the head of the Iran Chamber of Commerce, Industries and Mines. “Different ministries are coming up with different policies. It seems they react to the facts of the day,” he said.

While international sanctions increasingly are hurting the government and the private sector, Iranians seem to maintain have faith in their economy. Tehran’s stock market has seen a huge increase in trade, and there is no clear sign of a significant capital flight.

But faced with dwindling buying power, many Iranians are reconsidering their faith in the currency, a shift that could prove to be more significant than the sanctions.

The increasing exchange rate and the lack of foreign currency led to chaotic scenes at some banks. “People were literally screaming and yelling at the foreign exchange counters,” said a middleman operating in Iran’s vibrant steel industry, on the condition of anonymity. “They wanted dollars because the prices of goods they bought abroad was rising by the minute but nobody could give them any. It was chaos.”

He and other traders operating on Iran’s free market, the bazaar, saw profits disappear as the rial slid down versus the dollar. Steel prices have already increased by nearly 50 percent in the past two months because of the sanctions.

In the first sign that Iranians are becoming nervous about the currency, some businessmen are starting to send cash abroad. “People are traveling outside with their pockets stuffed with hundreds of thousands of dollars,” the steel trader said. “We feel the government is intentionally trying to break our backs.”

The government says its all-encompassing “economic evolution plan” – which includes the reduction of state subsidies and an increase in taxes and tariffs – will help combat monopolies and corruption.

Opponents say the plan is aimed at increasing the government’s income and influence and warn that a shock implementation will lead to unrest.

The government maintains that the goal of the subsidies plan is to elevate Iran’s poor, who, Ahmadinejad says, do not benefit from the current system. Instead, by keeping many prices artificially low, the existing structure mostly helps the middle classes, who consume more.

Many in that group, already affected by a sluggish economy, are preparing themselves for the change. They fear they will not be able to pay utility bills, which are expected to rise by at least 40 percent, but potentially much higher. A typical electricity bill for an urban middle-class family could rise from $8 a month to $48 dollars, according to bills that mention the price change. With average income of $500 a month, people would find such price hikes shocking – prompting officials to brace for possible protests.

To counter those increases, some groups designated as poor will receive handouts up to $40 a person each month.

Analysts doubt the Ahmadinejad government has the money it needs to make all those handouts. The government has declared the contents of the treasury a state secret, and even parliamentarians don’t know how many billions remain after two years of lower oil prices.

Many in the private sector, which makes up about 25 percent of Iran’s economy, feel they are victim of both government polices and the sanctions.

“The goal of these sanctions is to change the political behavior of the government– in the nuclear field,” Nahavandian said. “But instead it has intensified their political stances.”

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