Iran’s rial plunged against the US dollar in open-market trade on Monday, taking
its loss in value over the past week to more than a quarter in further evidence
that Western sanctions are shattering the economy.
The free fall suggests
sanctions imposed over Iran’s nuclear program are undermining its ability to
earn foreign exchange and that its reserves of hard currency may be running
low.
A day before Monday’s dramatic drop in the Iranian currency, Finance
Minister Yuval Steinitz said the sanctions were edging the Iranian economy
toward collapse.
“The sanctions on Iran in the past year jumped a level,”
Steinitz told Israel Radio, noting that as finance minister, he follows Iran’s
economy. “It is not collapsing, but it is on the verge of collapse.
The
loss of income from oil there is approaching $45 billion to $50b. by the year’s
end,” Steinitz said.
“The Iranians are in great economic difficulties as
a result of the sanctions,” he said.
But, one government official noted,
even as the Iranian economy was reeling, the government in Tehran continued to
pursue its nuclear program unabated.
“There is no doubt that the
sanctions are affecting the Iranian economy,” he said. “We have seen signs of
that for months now, and obviously that is without question. The problem is that
despite the current level of economic pressure, there has been no slow down of
the Iranian nuclear program and the recent IAEA report attests to
that.”
The official said the sanctions “were not there for sanctions
sake, but rather to stop the nuclear program. And in that they have not
succeeded.”
The official added this was why Israel, in addition to
calling for clear red lines on Iran’s nuclear program, was calling for
ratcheting up the sanctions.
The official said tightening the sanctions
came up in Prime Minister Binyamin Netanyahu’s meetings last week in New York.
Netanyahu met there with US Secretary of State Hillary Clinton, Canadian Prime
Minister Stephen Harper and UN Secretary-General Ban Ki-moon. He also spoke by
phone to US President Barack Obama.
EU foreign ministers are expected to
discuss ideas for further sanctions against Iran’s energy, finance, trade and
transportation sectors at a meeting on October 15.
Parliamentary
opponents of President Mahmoud Ahmadinejad say sanctions are not a major cause
of Iran’s economic problems and accuse his government of mismanaging the
economy.
“The first approach today is that authorities accept their
mistakes and failures, second, that they not blame their mistakes on others, and
third, that they invite all the pundits and experts to find a way to solve the
problems of the economy,” Iranian legislator Ezzatollah Yousefian was quoted as
saying by the Mehr news agency.
The rial traded at 34,200 per dollar
according to currency-tracking website Mazanex, down from about 29,720 on
Sunday. It was trading at 24,600 last Monday, according to website
Mesghal.
The rial’s losses have accelerated in the past week after the
government launched an “exchange center” designed to supply dollars to importers
of some basic goods at a special rate slightly cheaper than the market
rate.
Instead of allaying fears about the availability of dollars, the
center seems to have intensified the race for hard currency by linking the
special rate to the market rate, meaning that even privileged importers will
face sharply higher costs.
“The government’s initiative... brought to the
surface a tremendous lack of confidence in its ability to manage the currency,”
said Cliff Kupchan, a Middle East expert at the Eurasia Group, a political risk research firm. “The attempt to fix
it triggered a worse crisis via market psychology.”
The rial’s sinking
value will fuel inflation, officially running at about 25 percent; economists
say the real rate is higher. Rising costs could worsen the job losses that
Iranians say are hitting the country’s industrial sector.
But that kind
of language is premature, said Hassan Hakimian, of the School of Oriental and
African Studies of the University of London, because Iran has stockpiled some
basic goods.
“I am not aware of any shortages of basic necessities as
yet,” he said. “Well before that, the government will resort to some kind of
basic rationing so as to introduce a safety net.”
Some Iranian officials
continued to insist on Monday that the exchange center, which is supposed to be
funded by dollars earned with Iran’s oil exports, would eventually meet demand
for hard currency and thus strengthen the rial.
“The exchange center is
operating and once the next phase of the plan is implemented, the price of
currency will drop,” said Gholamreza Mesbahi- Moghaddam, who heads parliament’s
planning and budget committee, according to the Mehr news agency.
But the
rial’s accelerating slide indicates many Iranians have lost faith in
authorities’ ability to support it, and are scrambling to buy hard currencies to
preserve their savings.
“There is very little, effectively, the central
bank and authorities can do to calm the situation, because even when they take
extraordinary measures to calm the market... the market interprets those
additional measures as a sign of abnormality,” Hakimian said.
At the end
of last year, Iran had $106b. of official foreign reserves, enough to cover an
ample 13 months of imports of goods and services in normal times, according to
the International Monetary Fund.
But Nader Habibi, economist at the Crown
Center for Middle East Studies at Brandeis University, estimated last month that
the government now had about $50b. to $70b. of hard currency reserves
left.
Iran does not disclose timely data on its reserves – but if they
have dropped steeply, the central bank may have become reluctant to run them
down by supplying dollars to the market.
In a statement on Sunday, the
central bank said just $181m. had been traded on the new exchange center since
its launch six days earlier – a fraction of Iran’s imports of goods and
services, which total around $2b. per week in normal times.
“The
president has deliberately kept the market agitated,” Elias Naderan, who sits on
parliament’s economic committee, said on Sunday, according to Mehr.
“I
really don’t know what Mr. Ahmadinejad is thinking. What plan does he
have, what is his expectation of the system, and how does he plan to manage this
disorder?” The crisis has also prompted criticism of the central bank and
authorities by private businessmen.
“When the exchange center provides
only 10 to 20% of the market’s demand, one cannot expect it any more to play a
role in the exchange market,” Muhammad Nahavandian, head of Iran’s Chamber of
Commerce, was quoted by Mehr as saying on Monday.