| Kippreport.com

THREATS AND PERSUASION—Why Iran’s government is likely to win the battle of wills over currency

October 9, 2012 10:15 by Reuters

At the end of last year, Iran had official foreign reserves of $106 billion, according to the International Monetary Fund. Their current level is a closely guarded secret, but some analysts estimate they may have dropped by several tens of billions of dollars as the sanctions cut Iran’s oil income.

 

As much as a third of the reserves may be trapped in banks overseas, where they cannot be used because of Western banking sanctions, some analysts believe.

 

Meanwhile, Iran’s merchandise imports are running at a rate of a little over $50 billion a year, according to the latest official data. Last year, export earnings outstripped import payments by $51 billion, but some analysts think sanctions may already nearly wipe that surplus out this year.

 

Nonetheless, figures for trade and reserves suggest the country does not risk running out of hard currency in the very near term, but that it could start to do so in the next year or two if sanctions continue.

 

This risk may cause the government to ration dollar supplies tightly – providing hard currency to students travelling abroad if their discontent is politically troublesome, for example, but refusing to sell dollars to importers of luxuries, or to middle-class savers seeking to protect their assets from inflation.

 

And a state monopoly on foreign exchange would have other costs. The potential for corruption among officials handing out dollars is huge; Shabani said he had heard of people setting up bogus “export-import” firms in Iran just to obtain dollars.

 

“Depending on who you are and if you can get access to FX at a decent level, your cost structure will be totally different to others,” said Steve Hanke, economics professor at Johns Hopkins University in Baltimore. “That means the economy is replete with distortions and as inflation picks up, they get worse.”

 

Iran’s government may be content to accept such costs, however, if the system allows it to battle on against the West.

 

Emad Mostaque, a strategist at Religare Capital Markets, said the currency turmoil would be most damaging to the middle class and private merchants – but they were already not very politically supportive of the government.

 

People close to the government will be able to use official channels to get dollars, while the working class – 80 percent of the population – will not see its spending power fall too much as the government will provide subsidies, he wrote in a report.

 

“The current economic stress is nothing compared to 1988, where Iran halted the Iran-Iraq war with an economy in ruins following chemical weapons attacks, complete sanctions and oil at $10 per barrel,” Mostaque said. Oil is now above $100.

By Andrew Torchia

(With reporting by Marcus George, Yeganeh Torbati and Amena Bakr; Editing by Alastair Macdonald)

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Tags: Iran, iran currency, iran currency increase, stablising