Iran’s economic growth thrown into doubt by weak currency

Iran’s economic growth thrown into doubt by weak currency

Baku, Azerbaijan, Dec. 11

By Farhad Daneshvar – Trend:

While the Iranian government’s proposed budget bill for the coming year has sparked hot discussions over the country’s economic situation, the sharp plunge in the value of the national currency has cast shadow over the Islamic Republic’s capabilities to hit its economic objectives.

Earlier in the week, President Hassan Rouhani, through his proposed draft budget plan, forecast that the country’s economic growth over the next Iranian calendar year (starts March 21, 2017) will amount to 7.7 percent with an inflation of 7.6 percent.

This is while, the value of foreign currencies against Iran’s national currency, rial, has significantly increased in the country’s free market over the past several days.

Over the past week, the price of US dollar increased by at least 2,500 rials, with euro and pound sterling going up by 3,300 rials and 3,800 rials, respectively, in the free market.

While one US dollar was traded at about 39,078 rials on Dec. 10, euro valued about 42,285 rials with pound sterling at 49,370 rials in the free market.

In the meantime, the Central Bank of Iran put the official rates of the US dollar at 32,199 rials, euro at 34,005 rials and pound sterling at 40,482 rials on the same day.

The surge in currency prices comes after a relatively stable period in the country’s currency market, provoking public discussions over the future of economic situation in the Islamic Republic.

Budget bill seems to be optimistic on economic growth

"Considering the recent surge in the value of the foreign currencies, in particular US dollar, which will probably continue over the coming months, I assume that Iran’s current single digit inflation rate will again be at two-digit level, surpassing 10 percent over the next year," Alireza Kadivar, a financial analyst and deputy head of Iran’s Novin Investment Bank, told Trend.

When Rouhani took office in 2013 the inflation rate was somewhere above 30 percent, which over the current year dropped to single digits (9.5 percent) for the first time in a quarter century.

Although the administration officials have denied the government’s involvement in decreasing the value of the national currency against the US dollar, Kadivar still believes that the increase in dollar prices will help the government to cover a part of its budget deficit.

"Financial policies adopted by the Central Bank of Iran and the current deficit in the government budget are likely to lead the administration to increasing the value of the foreign currencies against rial," he added.

The government, however, says it is not in favor of increasing its income through higher dollar prices as the national purchasing power is of high importance for the administration.

In the meantime Saeed Laylaz, an Iranian economist who was an adviser to former President Mohammad Khatami, told Trend that he was not as optimistic as the government’s draft budget bill regarding the economic growth and inflation rate, though the country’s economy will continue to grow over the next year.

He forecasts that the economic growth in the country is more likely to stand somewhere at 4-6 percent rather than the budget’s anticipation of 7.7 percent.

Laylaz further believes that the inflation rate is also expected to "slightly" increase over the next year, reaching 11-13 percent.

Reasons behind rocketing currency prices

A group of Iranian economy experts say that the concerns over the proper implementation of Iran’s nuclear deal with the world powers, the possible implications of the outcome of the US presidential election, a surge in demand for foreign currencies in the country ahead of the New Year as well as the proposed rate for dollar (33,000 rials) in the administration’s draft budget bill for the coming year are among the main reasons for the rocketing currency prices.

On the other hand, a group of observers suggest that there are some other significant factors causing the violent fluctuations in the country’s currency market.

This group of experts says that the main reason behind the fluctuations is the galloping inflation over the past several years.

The inflation rate in the Islamic Republic in the Iranian calendar year of 1392 (March 2013-March 2014) stood at 34 percent, which fell to 15 percent in the following year, reaching 12 percent in the last Iranian year (ended March 21, 2016). The downward trend of the inflation rate continued over the current year, posting 9.5 percent.

These figures simply state the fact that purchasing power of Iranian consumers has decreased by 70 percent over the past three years. In other words, the value of the national currency has declined by 70 percent.

It appears that the value of foreign currencies in Iran over the past three years has failed to keep pace with the 70 percent inflation rate, therefore the government and Central Bank of Iran may adopt some financial and monetary policies to rebalance the currency market.

If this condition leads to the government intervention by means of suppressing the value of foreign currencies against rial, the country’s domestic production will face a risk of collapse as ordinary consumers find it more beneficial to purchase imported goods rather than the home-made ones.

For a period of 10 years since 2001, the Central Bank, ignoring the inflation rate, injected dollars into the country’s currency market in a bid to stabilize the currency rate – a failed policy as the prices of the greenback suddenly hiked in 2012 reaching 30,000 rials from the decade long 10,000 rials.

Over those years, thanks to the oil dollars, the government and the Central Bank were capable of keeping the control of the currency.

However, after years of devastating sanctions and plunging oil prices, the Iranian financial authorities do not seem to enjoy such rich monetary resources to protect the value of rial in the current conditions.

---

Farhad Daneshvar is Trend Agency's staff journalist, follow him on Twitter: @Farhad_Danesh

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