by Djavad Salehi-Isfahani
It’s not every day that Iran’s bazaar merchants close their shops to protest high prices. They are of course not protesting the high price of bread or chicken, whose prices have not increased, but of dollars, which have become scarce, hurting import businesses. In April, the government stopped the supply of foreign currency to private money-changers and required all foreign-exchange transactions to go through the Central Bank. Millions who relied on the so-called free market for their foreign-exchange needs—travelers, people sending money to their families abroad, businesses with foreign transactions, and those taking their money out of the country—were suddenly forced to deal with smugglers.
Within days of the decision to outlaw unofficial transactions, a black market emerged registering a high premium over the official rate of 42,000 rials per dollar, an increase of more than 100% this week. Many observers have erroneously used this rate as a barometer of the state of Iran’s economy. The conservative Cato economist Stephen Hanke predicted in Forbes that Iran’s economy is on “a death spiral,” and The New York Times described it as in “free fall.”
The reason why these dire predictions are wrong is simple: the influence of the black market on consumer prices in Iran is limited because only a small proportion of Iran’s foreign exchange passes through it. The government earns the bulk of the available foreign exchange and is saving it to import basic consumer goods. By squeezing the supply of foreign currency for what it considers non-essential uses, the government is limiting the risk of an uprising from the poor and the middle class.
So, rather than a sign of imminent economic collapse, the high price of the dollar is a sign of government prudence that may pay off in the long run.
The media, both inside and outside Iran, refer to the rise of the price of the dollar in the black market as the loss of value of the rial. This is also misleading. The real value of the rial is the amount of goods and services, not black-market dollars, that people can buy with it. As such, the fall in the value of the rial is better measured by the rate of increase in the consumer price index and not the exchange rate in the black market. As it happens, the rise in the consumer price index is much slower than the hike in the black-market exchange rate. Consumer prices have risen by six percent since the beginning of the Iranian year (March 21, 2018) while the dollar has more than doubled in price. Nevertheless, for consumer prices this is a high rate of increase in three months (27 percent annual rate) and an indication that President Hassan Rouhani’s economic program, which was centered on bringing inflation down to single digits, has collapsed.
As in the past, inflation will slow as the effect of devaluation passes through the economy and the uncertainty regarding the new round of sanctions resolves, but economic growth will remain far below its historic five percent range.
There is considerable uncertainty whether Europe can find a way to keep trade and financial flows with Iran open, and if China and India, which together import half of Iran’s oil exports, will defy Trump and continue their purchases. But there is reason to believe that sanctions will not be as effective as they were under Obama, when Iranian oil exports dwindled to fewer than half a million barrels per day and were heading down even further. Back then the US extraterritorial sanctions had more bite because of a global consensus over the need to slow down Iran’s nuclear enrichment program.
Today, with Iran in full compliance with the international nuclear watchdog, the International Atomic Energy Agency, and the US condemned for its unilateral withdrawal from the Iran nuclear deal—not to mention the ill will the Trump administration has generated globally by trashing other international agreements and starting tariff wars—it may be harder for the US to force other countries to comply with its sanctions. The US ability to punish countries and companies that continue to trade with Iran has not diminished, but the moral force behind it has. Established companies will not risk stiff penalties or the loss of access to the US market by breaking the sanctions, but others would feel less guilty for helping Iran get around them.
But external sanctions are only one side of the story. In Iran, people speak of internal sanctions, by which they mean domestic obstacles to economic growth. Several factors make Iran’s present situation more perilous than in the past.
First, in 2012 oil prices were 50-60 percent higher than they are today, so the little oil that Iran sold brought in more money than it would now. Oil prices may recover somewhat as Iran’s oil exits the market. Barring unexpected disruptions in global supply, however, they are unlikely to reach their pre-2014 level.
Second, Iran’s banking system is in much worse shape now. In 2012, as the recession was starting, the assets of the banks, many of them linked to real estate, were losing value and the banks were sliding into insolvency. Today, five years later, these banks are unable to lend because they are still struggling to shake off their bad loans.
Finally, last month I found the mood in Iran much less optimistic than it has been for a long time. In the past, people habitually grumbled about the poor state of the economy but displayed optimism at election times, as in 2013 and 2017, when they elected the moderate and reformist government of Rouhani.
And now, with the collapse of the nuclear deal, and with it Rouhani’s economic program, Iranians do not know what to hope for. The display of public anger, which we see in sporadic protests over diverse but real issues such as water, failing banks, lost wages, and most recently the rising price of the dollar, may be an indication of this lost hope.