Iran Eliminating Low Dollar Exchange Rate Meant To Control Prices

Iran will stop offering cheap dollars to importers next year that was meant to keep prices of essential goods low amid the inflationary impact of US sanctions.

President Ebrahim Raisi (Raeesi) went to parliament on Sunday to present his budget for the coming Iranian calendar year that will begin on March 21, 2022. Except some general budgetary numbers, details are scarce and it is not clear how the government is planning to deal with a growing deficit that this year is estimated to be more than 50 percent.

But one deficit-fighting measure is to stop providing cheap dollars to importers of essential goods, saving around $8 billion annually. The problem is that many in parliament, economists and politicians say this would add fuel to inflation, which has already reached 45 percent this year.

Just before the United States pulled out of the 2015 nuclear agreement (JCPOA) in May 2018, the former Iranian president Hassan Rouhani decided to offer dollars at 42,000 rials for essential imports to keep food and medicine cheap. Iran’s currency was already falling in anticipation of the US withdrawal from the nuclear agreement and new sanctions.

The subsidized dollars however did little to keep prices low, as imported grain, rice, sugar and animal feed reached consumers with ever higher prices. Simply, those importing the essential commodities and businesses in the supply chain pocketed huge profits. There were also proven cases of companies applying to receive the cheap dollars and then importing luxury goods, such as thousands of foreign cars.

US sanctions have dramatically reduced revenues for the Islamic Republic, which heavily depends on oil exports. Not only Tehran is getting a fraction of its usual oil income but trade in general has suffered because of US banking sanctions, forcing Iran to offer low prices and still struggling to bring back dollars earned.

Raisi claimed that past administration tied the fate of the country's economy to foreign sanctions, but his budget has ignored those restriction and will deliver health economic growth.

How the Raisi government has put together a budget that at least on paper is supposed to be balanced is shrouded in accounting gimmicks and over-optimistic assessments. It projects selling more than a million barrels of oil per day at around $60 per barrel, an over-estimation unless the United States lifts its sanctions. It also projects selling billions of dollars in government assets to raise money, but there is little no capital or confidence left among the people and investors for buying these assets.

Mostly politically well-connected people and officials who have either become rich or know others with money will scoop up some valuable real estate and other assets, at a fraction of their value. Quasi-governmental companies, such as those belonging to the Revolutionary Guard and foundations under Khamenei’s control will be well positioned to buy the cheap assets the government offers.

In practice, officials running these companies are like private owners, making money for themselves, their relatives and friends without any transparency and accountability. In the past 15 years most “privatization” deals have ended in stories of corruption, some exposed by dissatisfied workers or rival factions within the regime.

Other than unsubstantiated revenue numbers from oil and asset sales, the Raisi government has little else to balance its budget on paper.

The Chairman of Iran-China chamber of commerce Majid-Reza Hariri warned in November that Iran’s economy is “at its most dangerous period in its 40-year cycle of inflation” and can expect to reach “hyperinflation” in the coming months.