Cheap USD, Ahmadinejad's trap for Iran's president-elect Rohani?

Iran Materials 27 June 2013 18:02 (UTC +04:00)

Dalga Khatinoglu, Trend Agency's Iran Service Head

Two weeks after Hassan Rohani's victory in the presidential election, the USD's exchange rate against Iran's national currency, the Rial, dropped by 20%, but rose by 10 percent during last two days again.

Before Rohani's victory, the price of the dollar was about 36,500 Rials on June 14, which decreased to below 30, 000 Rials in ten days, but rose again to 32, 300 Rials on June 26.

The Governor of Central Bank of Iran (CBI) Mahmoud Bahmani rejected rumors of an injection of a huge amount of USD into open markets to decrease the dollar's exchange rate by the CBI, while economist and former member of Parliament Ali Mazroui told Trend that the CBI is unable to set the USD's rate in Iran and the main reason for increasing the rial's rate compared to USD is the sale of USD by people who holds the $18 billion in USD reserves because warning about falling the USD price in Iran After Rohani won.

Mazroui says that after moderate Rohani who is looking to eliminate the nuclear dispute with West won, Iranian citizens thought that dollar would fall in price because the sanctions would be eased and some of them sold their dollar reserves immediately and made shuck to market. "But because of a $7 to $8 a month USD demand in Iran's open markets, the decrease of USD value in Iran stopped and then rose again to above 32,000 rials" he said.

Mazroui went on saying that the CBI has suffered from transferring revenue from petroleum exports into the country because of sanctions and then having no tolls to set on the USD rate or the ability to inject a huge amount of dollar to open market.

"The USD's exchange rate in Iran should be changed due to economical indexes, but non of economical indexes changed during last two weeks; therefore keeping the USD rate cheaper is not possible," Mazroui said.

However, serious doubts hang over the CBI's attempt to devalue the USD in Iran's open market, especially after Managing director of Iran's Gold, Jewelry and Silver Industry Export Development Fund,Ali Fakhr-Movahedi said last week that Ahmadinejad wants to hand over presidency to Rohani with 24, 000 rials per each USD.

According to yearly budget, the USD price offered for importers at Iran Foreign Exchange Center was set at 24, 000 rials.

What happens if cheep USD becomes a game?

The Supreme Audit Court of Iran released a report on June 19 says that that the Central Bank has devalued the national currency through selling foreign currency at rates higher than the official one.

The report which for the 2011-2012 fiscal year shows that the Central Bank gained immensely by selling USD at a high rate. Iran sold $102.9 billion worth of crude oil and gas condensates during mentioned time and $94.6 billion has been deposited into state coffers.

The Iranian government has compensated the budget deficit partially by selling USD at a high rate, nevertheless, the amount of budget deficit for the last solar year is estimated to be above $60 billion.

The year-to-year inflation rate for last month of Iranian calendar year was reported at 41.2 percent, mostly because of huge liquidity in the country.

During Ahmadinejad's presidency, liquidity in the country increasedd 6.7 times to 4.5 trillion rials($187 bln based on USD rate in Iran Foriegn Exchange Center- each USD is 24, 000 rials) ; it is vital that it be channeled to investments.

The Iranian government has about 5 trillion rials ($208 bln based on 24,000 rial for each UAD) in debt as well, and during last weeks some Iranian media outlets reported that CBI is injecting its foreign exchange reserves to markets, aimed to pay off some a part of government's debts.

If Ahmadinejad were to do this and wants to hand over the government to Rohani with a low price dollar, it is not clear how Rohani would compensate the deficit from Ahmajinedad's dire legacy with cheap USDs.

Rohani will assume the presidency in several weeks.

Based on the yearly budget, it's set exporting 1.3 mbpd of crude oil with $97 per barrel, while according to International Energy Agency Iran's oil export for first five months of 2013 was about one mbpd and the oil prices is around $100 to $107 per barrel. On the other hand Iran is unable to transfer the petroleum dollars into the country.

The CBI has likely boosted USD injection to open market After Rohani's victory to show the 40-percent drop in Iran's national currency's value during last year was not because of the government mismanagement, but political motivated issue.

Ahmadienjad's government has been accused of leading unsuccessful economic policy which led to contraction of the economy by 1.9 percent in 2012, 32 percent inflation and the closing of 40 percent of all industrial units.

When Rohani assumes the presidency, he would unable to keep USD injection in high amount into open market and after a couple of months the dollar rate in Iran would rise again.

An issue that would show no deference is that between Ahmadinejad and Rohani's management and the hopes for good economic performance is a dream.