The rial challenge

The rial has been erratic for almost a year. This month,it lost approximately 80 per cent of its value,forcing traders in Tehran’s central bazaar to shut shop and civilians to stock up on staples in bulk,since prices climb even as customers await their turn at the counter. The exchange rate had not been affected for years,even as Iran battled double-digit inflation. In fact,the very business people raging at the Mahmoud Ahmadinejad regime and the Central Bank of Iran (CBI) had earlier demanded,and got,the rial devalued to compete against cheap imports. The problem is,therefore,not devaluation itself,but unplanned devaluation,which has made the market unpredictable and put the private sector at a disadvantage,since state-supported companies continue to have access to the official exchange rate. Ironically,the reason why Iran’s energy minister,Majid Namjoo,sought Indian investment against the backdrop of sanctions and a tumbling rial in New Delhi last Wednesday is that the private sector still remains mostly untouched by sanctions.

The Islamic Republic’s economy has traditionally seen high liquidity. To absorb the cash floating around,the regime offered high interest rates for banks and government bonds. Therefore,no matter how hard the US- and EU-imposed sanctions are biting,the role of policy is the primary explanation of the rial’s fall. It’s not that sanctions haven’t had any significant impact. Iran has lost half its oil markets abroad. Besides,the US penalty on any entity dealing with the CBI has made it extremely difficult for Tehran to park or route its oil money — in late 2011,for instance,Dubai’s Noor Islamic Bank stopped clearing Iran’s oil money. With the EU embargo on its oil since July 2012 slashing Iran’s oil income by 45 per cent,and the country a great distance now from the 2.5 million barrels per day of crude it once exported,there aren’t enough petro dollars for the CBI to sustain the rial’s value.

And yet,the fact that those who rioted are mostly the conservative traders who had bankrolled the Islamic Revolution once and been staunch backers of the regime since has exposed to the world what Iran watchers had been saying — economic mismanagement is the most tangible danger to the regime,even if it doesn’t bring it down. The rial’s high value was politically determined. Its slide has destroyed perhaps the only genuine economic indicator. How did the regime make the mess messier? It ignored the CBI’s opinion — and the circumstances of high inflation and a deteriorating business climate — and lowered interest rates. That was the moment the rial started plummeting. Ahmadinejad,however,chose to blame private money dealers,political opponents and even the press — the “mob”.

The complicated strategic game,whereby the US is using the Israeli prime minister’s rhetoric to pressure Tehran while appearing to hold Israel back,rules out military action against Iran’s nuclear programme for now. But that doesn’t mitigate the regime’s desperation at home. What will it do hereafter? Given its record,it’s unlikely to be able to rescue the detonated economy. It can sit with the P5+1 and get some of the sanctions eased,as Hillary Clinton has hinted. Even then,would Ahmadinejad reverse years of populism,that is,ill-supervised loans,large-scale housing projects,monthly doles for rising fuel and food prices — his policy of sending oil money to every home? Ahmadinejad fought inflation not by balancing the budget,raising rates or restricting liquidity but by increasing imports,which amounted to almost $70 billion in 2009-10. There’s zero market confidence in the CBI’s chances of mitigating the crisis. It cannot opt for the market rate as a new single rate without tackling inflation,and it cannot opt for the official rate — a cheaper dollar — with the sanctions in place and petro dollars scarce. Iran,as a result,is returning to the 1980s,which means increased rent-seeking,unfair advantages to state-run businesses and overwhelming corruption. Anybody invested in the geopolitical stability of the Gulf — and its oil — would pray something gives soon,and from within.

sudeep.paul@expressindia.com