The consequences of USD rate jumping in Iran

The consequences of USD rate jumping in Iran

Head of the Trend Persian service Dalga Khatinoglu

Rising USD rate by 40 percent and more than 45 cents difference between the rate in the open market and official statistics in Iran caused some serious confusion.

Iranian Mehr News Agency reported on Wednesday, that rising USD is happening with out any obstacles. According to the stats of Iran's Central Bank, the USD rate is 11,000 rials, while USD rate in the open market it is 16,000 rials.

Just two days ago, the rate was 14,250 rials, while this figure was 10,600 rials last year.

Liquidity and bank interest

One of the major causes of increasing USD rate is the existence of high liquidity in Iran, which has exceeded equal to over $300 billion, according to the latest statistics by the Central Bank of Iran show.

Iranian government cut the subsides since December 2010 and pays more than $3 billion of cash subsides to citizens per month. International Monetary Fund says Iran's liquidity growth in 2012 will reach 15.9 percent as well. Increasing liquidity results in boosting inflation rate and causes the decline of national currency.

Considering that the bank interests in Iran are lower than the inflation (which is 20 percent), being economic risks in the industry investment sector and the continuity of the downturn in housing market with 15 percent increase in house construction expenses, have led to huge amounts of loose liquidity being directed to foreign exchange and gold markets.

Sanctions on Iran's nuclear program

International sanctions on Iran's disputed nuclear program resulted in tightening the country's trade bottleneck based on USD. Transferring USD to Iran has faced major obstacles.

For example India, that was importing 400,000 bpd of oil from Iran last year, faced a problem of transferring oil money to Iran after a ban imposed by India Central Bank to make trades with Iran using the Asian Clearing Union, and this caused a gathering of 5 billion debts based on USD of Iranian oil imports.

India paid off its debt after 6 months by Turkish banks, however, the problem of transferring USD to Iran still remains and India's oil import from Iran decreased to 350,000 bpd.

Earlier, Mehrdad Emadi, the economic advisor of Europe Union said during an interview with Trend that similar problems exist with China.

"Iran has to sell more than 500, 000 bpd of crude to China based on yuan, not USD", he said.

United Arab Emirates, having a $15 bln trade turnover with Iran in 2010, had to tighten transferring the USD to Iran, which led to suspend two country's trade for a day on Dec.21. All of this is happening due to the pressure coming from the U.S.

Iranian Government's interest

Some Iranian Parliament members have warned about government's $15 billion budget deficit for current solar year (started on March 21). Head of Supreme Audit Court Abdolreza Rahmani Fazli said earlier that the government borrowed $5 billion from Central Bank of Iran, while $5 bln was allotted out of public budget and $3 billion from oil revenues illegally to pay off cash subsidies.

Central Bank of Iran is obliged to supply open market with USD and the more is the USD price, the more CBI gains. Silence of CBI against rising USD is likely, because of its huge financial interests.

However, falling of Iranian national currency would damage its suffered economy by sanctions.

The sudden rise of inflation rate resulted in jumping of the USD rate, especially without boosting the country's export this can lead to economic crisis and serious consequences.

The only benefit of rising USD in Iran is to help boost the export, because of falling the cost of internal produced goods compared to abroad and then it will be easier for Iranians to compete in international markets.

Non-oil export shares only about 15 percent of Iran's total export, and the question how Iran can boost its exports, is left open.

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