Iran Economy News Multi-Tiered Exchange in Iran and the Corruption That Results

Multi-Tiered Exchange in Iran and the Corruption That Results

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Iran's multi-tiered exchange rate system is paving the way for vast corruption and fraud by the government as the controller of the country's financial transactions

By Jubin Katiraie

Very rarely in today’s world can one find the world’s dominant currency, the US dollar, being offered at three different exchange rates in a country. But the Iranian regime is one of these rare examples. This would result in systematic corruption and rent in the governing system. 

By definition, the currency is generally an accepted type of money, including coins and paper notes, distributed by the government and circulated within the economy. Currency, which is used as an intermediary for the exchange of goods and services, is the basis of businesses. Foreign currency is a commodity like national currency, and it has a market that consists of both supply and demand. Another task of the currency market is to provide credit. This, like goods, requires a transfer from the seller to the buyer. Like any other commodity, the supply of currency is directly related to its price (exchange rate). 

Types of Currency in Iran 

Government CurrencyThis is a currency that the government sells through banks at the state rate and is still offered at a rate of 4200 tomans per US dollar and used for the import of basic commodities. 

Nimaii Currency: Since February, there have been whispers about the formation of an organized currency market that finally unleashed the Central Bank in May 2018 after a dramatic drop in the rial against the dollar. Nimaii actually stands for “an integrated system of currency trading”, and the system began its work with the purpose of organizing the foreign exchange market in trade, import, and export. The necessity of the Nimaii Currency and the organized currency system were highlighted when there was a deep divide between the government exchange rate and the free market exchange rate in 2018 that raised the concern of many importing businessmen. 

Free CurrencyThis is the free market currency of the country. 

The history of single rate currency in Iran 

In common practice in countries with a healthy and economically banking system, single rate currency is a very positive, effective and important factor in preventing corruption and rent-seeking. But in Iran, where rent-seeking is an integral part of the banking and economic system, the system is neither able nor able to monetize the exchange rate. This has been tested several times during the life of this regime, but after a short time, it has stalled and failed. 

During the Iran-Iraq war, the exchange rate was almost single-rate due to the fact that there was no production system in the country and the major supply was based on imports. But since then, currency in the system has always been offered at different rates. 

In April 1993, for the first time, the currency in the Iranian economy became a monolith that lasted for seven months. In 2002, the Central Bank of Iran, ordered to “reform the country’s administrative system”, began to implement a policy of exchange rate consolidation and began a “managed floating currency system”. But in practice, only the US dollar exchange rate fluctuations were controlled, and at the price of the dollar increased every year. In 2010, due to inflation and the increase in liquidity, the gap between the government exchange rate and the free currency was created again. 

Since the presidency of Hassan Rouhani, the proclaimed purpose of the government was to make the free market and banks currency single rate from the beginning of autumn 2014. But that goal only remained to be stated. In December 2016, during month, a 20% jump in the free market exchange rate of Iran occurred. In January 2017, the price of the dollar exceeded 2 USD, which was directly linked to the uprising of the Iranian people. 

In the spring 2018 and on the eve of the US sanctions against the regime, the price of the dollar in Iran exceeded 5800 tomans, so that in mid-July, every dollar traded close to 9000 tomans, in early August it reached 12000 tomans. In mid-September, it reached 14000 Tomans and in early October 2018, it reached 20000 Tomans. 

In the wake of the currency turmoil stemming from the worsening economic situation of the regime on the one hand and the return of sanctions on the other, Eshagh Jahangiri the Iranian Vice President, declared that the exchange rate was 4200 tomans and any foreign exchange buying and selling at a higher rate would be considered as a violation and would be dealt with by the government. But the claim was nothing more than a mockery for the regime. 

The exchange rate, with a temporary decline, remained well above the market rate until the government was forced to incorporate the Nimaii into the country’s currency system. 

Two rates of currency cause corruption and rent 

Nearly five years have passed since the announcement of the 4200 tomans exchange rate in the Iranian exchange and trading market, a rate that economic experts believe will provide behind the $10.billion for the basic commodities in next year’s, a rent of about 70 trillion tomans and no one can give a hundred percent guarantee to prevent it. 

Following the announcement of the regime that “all exchange rates are considered to be smuggling and only the rate of 4200 tomans is recognized”, the import of goods at this rate generally took place. 

Soon, however, a price difference between 4200 to 13000 tomans in the free market led to a sharp increase in imports and a significant outflow of currency, a heavy rent was created and the commodity market situation, instead of being regulated by a low exchange rate, was met with a high price, with no sign of the imported commodity at a preferential currency rate. 

Accordingly, the regime changed the current policy to a certain extent and the allocation of 4200 tomans currency was limited to a set of commodities, and on the next only the import of basic commodities was allowed at this rate and the rest of the commodity market was financed in the Nimaii market and the currency due to the export goods. 

However, the basic commodities, although received the 4200 currency, their distribution was not guaranteed at the imported rate, and the considerable multiplicity of currency and rent between this rate and the market caused that the price of commodities was calculated at the free market rate. 

Rent and corruption in the currency in 2019 

In the 2019 budget, $14 billion was envisaged to provide basic commodities with the preferential currency exchange rates. This led to widespread corruption. 

At the beginning of 2019, the Rouhani government announced that it “would accept the 4200 currency rate causes rent and that the regulatory conditions would not be such that the imported goods at a preferential rate would be made available to the public.” The media subsequently unveiled an $18 billion corruption case affiliated with the regime’s dealers. In a letter to the First Vice President of Rouhani, the Prosecutor of the Computing Court wrote in December 2019: “The dollar at a rate of 4200 Tomans practically caused auction and loss of $ 3.459 billion in resources under the cover of currency rents.” 

It looks like that this flow will continue this year. The budget bill shows the assignment of $10.5 billion with the 4200 tomans currency rate for the supply of the basic commodities. 

While drafting a budget bill, it was allegedly proposed to eliminate the 4200 currency and to import commodities and medicines at the same and Nimaii import rates and subsidize them in exchange for government price differences. This was not accepted. 

Now while the basic commodities should be imported with the 4200 ratesgiven that the currency rate in the Nimaii market is 11,000 tomans per dollar at present, it will now create a price difference of about 70 trillion tomansfor which the regime has already sharpened its teeth. 

Problems with the elimination of the currency 

The elimination of the 4200 currency will also have other problems for the regime. Announcing the removal of it for the basic commodities, medicines, and medical equipment can trigger a surge in prices and cause commodity hoarding by some importers or distributors, given the past experiences the rise in the price of foreign exchange seems obvious and can make people’s access to essential commodities, especially drugs, very difficult. 

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