On Iran's currency crisis

Mr. Sasan Fayazmanesh is Professor Emeritus of Economics at California State University, Fresno. In his comments below, he makes two main points.

(1) Iran’s currency crisis has been coming in waves for years, and each time a new and lower value for the rial is established.

(2) The cause is the Western blockade, but chiefly the ineptitude of Iranian politicians who, like all politicians, lie and seek to protect their own careers. Iranian politicians could point out how the Western blockade is hurting average Iranians, but instead they prefer to stay in denial, boasting that the sanctions have little effect. This denial only encourages more and more sanctions.

Mr. Fayazmanesh says that if Iranian politicians do not stop their foolishness, and deal seriously with the blockade, then the currency crisis will continue to worsen, and Iran will indeed fall to the West.

I will summarize his comments below.

In September and early October of 2012, the Iranian rial was in a state of free fall, relative to the value of major world currencies and gold.  The government of Iran, as well as the Central of Bank of Iran (Bank Markazi), appeared to be helpless in stopping the nosedive.

This only applied to informal currency trading inside Iran. It did not apply to Iran’s foreign trade. Nonetheless, it meant that Iranians were losing confidence in their own currency, which meant economic chaos inside Iran. Naturally the USA blames Iran’s government for this, not the U.S. blockade. So did Ahmadinejad’s political opponents inside Iran.

These criticisms of the Iranian government have merit.

Iranian economists have criticized the government for such things as doing away with the Management and Planning Organization of Iran, shrugging off the effects of sanctions, lacking any concrete plan to deal with sanctions, showing little transparency in financial matters, rent seeking, giving out cash subsidies after the removal of some price controls, and arcane and arbitrary ideas of Ahmadinejad that interfere with the work of the Central Bank (Bank Markazi). Some even criticized the Central Bank’s own inability and confusion as to how to deal with the economic woes of Iran.

In fact, the latest policies of the Central Bank, as well as the Ministry of Finance, have raised the ire of many Iranians. Faced with the falling value of rial and rising inflation, the Central Bank has followed a complicated set of exchange rates: a fixed rate of 12,260 rial per dollar for imports of some essential items, a free or floating market rate for non-essential items, and a rate 2% less than the free market rate for items in between.

Moreover, on September 23, 2012, the Central Bank created a “currency exchange center” that would offer dollars at the market rate minus 2%. Yet, the creation of this center failed to calm the market, and the Central Bank was accused of not providing enough currencies to the center. Indeed, the measure came too late to have any calming effect. 

NOTE: Mr. Fayazmanesh then goes on to list numerous currency crises that have hit Iran. He includes copious facts and statistics, which I will omit. His point is that the currency situation has steadily worsened over the last two years, and the chief cause is not the Western blockade, but the denial and ineptitude of Iranian politicians. For example, Iranian politicians claim to have made contingency plans to deal with the blockade. Mr. Fayazmanesh shows that this is not true…

AP reported that according to Vice President Mohammad Reza Rahimi, authorities in Iran had already stockpiled imported goods and hard currency to help cushion the blow to the economy. The same AP report quoted Iran’s Central Bank Governor Bahmani as saying: “We have not remained passive. To confront the sanctions, we have plans in progress.”

However, the subsequent economic difficulties showed that Iran did not really have any meaningful contingency plan at all. Indeed, the July 7, 2012 meeting of heads of three branches of the Iranian government to draw up policies to combat sanctions, which was reported by Mehr News Agency, indicated a lack of any serious plan to deal with the draconian Western sanctions.

Some at the highest level of the Iranian government even tried to downplay the seriousness of the sanctions. For example, on July 7, 2012, Ayatollah Khamenei was quoted by AFP as saying: “Westerners are making much hype about sanctions against Iran, but they don’t understand that they have vaccinated the Iranian people themselves by imposing sanctions over the past 30 years. . . Iran has resisted all sanctions and is now 100 times stronger than 30 years ago.”

COMMENT: Mr. Fayazmanesh then gives more copious facts and statistics, which I will omit. His point, again, is that the Western blockade is only partly to blame for Iran’s currency crisis. Most of the blame falls on Iranian politicians. 

The purpose of sanctions is to destabilize the economy, inflict pain on the population, bring about panic and riots, overthrow the government of Iran, and install a US-Israel friendly government. That is why people such as Benjamin Netanyahu continuously threaten Iran with military actions. The threats are intended to bring about harsher and harsher sanctions. They are also intended to create fear and uncertainty in the financial and productive sectors of the Iranian economy.

The Iranian government and the Central Bank of Iran have shown to be mostly inept in dealing with the effect of these sanctions, even though Iran faces a war economy and the resulting inflationary pressure.

Most Iranian officials at the highest level of power are in denial. Some continue to boast that the sanctions have no effect. Others, particularly Iranian military officials, add to the fear, uncertainty, and speculative bubbles by repeatedly talking about an impending military attack on Iran, and how Iran can withstand such an attack and even retaliate. Such utterances play into the hands of Israel and its US-EU allies.

Ruthless sanctions and threats of war are creating financial instability in Iran, and this could easily escalate into a massive and uncontrollable economic crisis, followed by social unrest.

Unless the Iranian government starts taking these sanctions seriously, and takes drastic actions to calm the market, Iran’s adversaries could accomplish what they set out to achieve.

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