Economists warn Iran's president-elect about liberalization plans

Economists are warning Masoud Pezeshkian that rushing his plans to liberalize the economy including closing the gap between the official and market currency rates could cause a sudden economic shock.

Economic experts assert that the multi-rate currency system, with the government offering cheaper dollars to some importers, has primarily benefited a small group of merchants (rentiers) with political connections, fostering massive corruption.

Iran's currency that has steadily declined since the overthrow of monarchy in 1979, has experienced sharp falls since 2018 when the United States withdrew from the JCPOA nuclear deal and imposed oil export sanctions. The government, trying to prevent massive price hikes for imports, decided to offer cheap dollars to importers, indirectly subsidizing food, medicines and animal feed. However, influential insiders took advantage of the cheaper currency system to line their pockets with fake imports and still high prices for consumers.

These rates include the ‘preferential rate’ provided to importers by the government for food and medicine, cheaper than in the NIMA rate system whereby exporters must transfer their earned currency to importers. Then there is open market currency rate, which everyone can use to buy and sell foreign currencies at much higher rates. This is regulated by supply and demand, although the government tries to impact rates by periodically releasing dollars to banks and official exchanges.

Pezeshkian and his economic team led by Ali Tayyebnia, a prominent economist and former economy minister under President Hassan Rouhani, have vowed to eliminate the various rates to prevent corruption and stop the government’s extensive manipulation of the currency market.

Conservative politician and economist Ahmad Tavakkoli in an interview published Sunday, insisted that eliminating different currency rates is a “deadly advice” by the International Monetary Fund (IMF) that the governments of Hassan Rouhani and Ebrahim Raisi tried to implement. The outcome, he said, has only been further devaluation of the national currency and higher inflation.

“[Tayyebnia] must first explain who will determine the single rate, the government or the market? What rate will the government use to sell the currency [from oil exports)? The market rate?” he asked.

Already, some estimates say that one-third of the population has fallen below the 'poverty line' with annual inflation around 40% since 2019. If the government stops offering cheaper currency - or its indirect subsidies - food prices will soar, leading to dangerous instability.

Tavakkoli argued that allowing exchange rates to be decided by the market will not reduce demand for currency as personal investment or for exodus of capital. Open market rates will continue to grow and cause higher inflation and instability in the economy, and the government will eventually have to revert to two rates to avoid the ensuing destabilizing effect.

In a letter addressed to Pezeshkian, Farshad Momeni and Hossein Raghfar, two other prominent economists, similarly warned the new government about the consequences of plans that would “shock” the economy and put more pressure on the livelihood of the lower-income Iranians.

Momeni and Raghfar insisted that the new government must instead reduce its own unnecessary expenditures and avoid policies that could entail higher inflation, unemployment, and a higher income gap or encourage profiteering and corruption.

However, few experts or commentators dare to openly say that Iran's anti-West foreign policy, regional adventurism and nuclear program, resulting in sanctions, are key reasons why inflation is crippling the economy. A high degree of government ownership of businesses, top-down management of the economy that breed inefficiency and corruption, are also detrimental factors.

Pezeshkian has repeatedly vowed to end the government’s extensive intervention in the economy including strict price controls on various products that range from food and fuel to domestically produced cars and construction material, and to allow the “real private sector” and the government's ownership of most major companies.

He also insists that the eight percent economic growth prescribed by the country’s development plan is not achievable without foreign investment and has promised to try to solve the problem of paralyzing sanctions through engagement with the West and accession to the conventions of the Financial Action Task Force (FATF).

In a statement last week, Pezeshkian said the removal of sanctions would be a lengthy process and listed some of the most urgent economic tasks that need to be addressed in the first two years of his presidency.

Improvement of the economy and the lives of ordinary Iranians before sanctions are lifted is only feasible if the “wastage” of energy and foreign currency resources is reduced, the statement said.

The statement said the government’s direct and indirect ownership of big companies and lack of economic transparency and discipline were two areas that require urgent attention.