Can Iran stop the rial’s death spiral in the long term?

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The Trump administration imposed a new round of sanctions on Iran on November 5, 2018 aimed at zeroing oil and gas exports and announced that these sanctions would be the toughest yet on Iran. Then, Secretary Pompeo announced that eight countries would be exempted from Iran’s sanctions on humanitarian grounds, to supply food and medicine, but this exemption was temporary and would be subject to an immediate reduction of 40 to 50 percent of Iran’s oil purchase.

The Iranian regime, which was looking for an opportunity to ride on the wave of the exemptions for the eight countries on Iran’s oil purchases, used mass propaganda to induce the popular belief that the United States had failed completely in Iran’s sanctions and they would not disrupt Iran’s foreign exchange earnings.

But, according to credible reports, after November 5, the Iranian regime has been providing artificial respiration for its controlled economy by taking tens of millions of dollars from banks and injecting it into the market to absorb the shocks of the sanctions. This, of course, against a backdrop of suppressive military-police activity, including daily executions, carried out to create an atmosphere of fear and intimidation.

Artificial lowering of the dollar

Regime officials in Rouhani’s government are tasked with artificially showing a low rate for the US dollar, even though trading remained stagnant and stopped. According to economic experts, overdrafts from banks and artificial injections of cash are not a durable solution, and the regime cannot continue to do this for long. In effect, the experts say, this solution causes Iran’s frail economy to suffer from osteoporosis.

Now, while in the Tehran market the flow of currency trading has virtually stopped, with almost no trading being done, the regime is doing its best to keep the dollar artificially low to pretend the economic situation is normal and to deny the existence of any crisis.

Regarding the plan to inject money into the foreign exchange market, the Qods’s news agency, Tasnim reported that the chairman of the specialized commission of gold jewelry said on the role of central banks in injecting cash into the currency market: “The main reason for decline in the dollar rate is the central bank’s control on the currency rate, which is carried out through a limited and continuous supply of currency, and maintaining this trend would depend on continued implementation of this policy.”

On the injection of government money, an economic expert of the regime told the state-run TV channel on November 14, 2018: “The banks, due to commitments made to their depositors and their customers, because of competition or for any other reason, have no alternative solution to this process and have entered a monetary creation process.”

Kamran Nadri, an economics expert and university professor, told the state TV about money injections by the government: Yes, it seems that in the current situation, considering the events that have happened in the past, banks have no choice but to actually continue monetary creation. But how far this process can continue depends on the central bank. Because now through granting of a credit line to the banks, the central bank gives them the opportunity to continue their operation.

Failed efforts

The Quds Force News Agency on November 14, 2018, wrote on repressive measures and intimidation in the regime’s plans to contain the situation: In recent weeks, the proper economic, judicial and security management, caused the stability and declining rates of currency and coins.

On the other hand, also on November 14, 2018, a regime’s economic medium called Trade News, considered the regime’s actions temporal and wrote: The real impact of sanctions on markets, including coins and currencies, will occur in December, and these markets will experience a lower price inflammation than before.

Euronews reported on November 15, 2018, quoting market experts and activists, that wide comprehensive sanctions shocked the market with reduced demand. The major market demand provided by business owners and importers has stopped in recent days. In fact, they are considering the possibility of continuing to trade with the global economy and finding less risky methods, so they have now stopped buying the currency.

The website of the policy of the day (Siasate Rouz), also on November 15, 2018, wrote that some government media outlets, following the execution of Vahid Mazlomin and Mohammad Esmaeil Ghasemi, amid state radio and TV stations propaganda to curb the downturn in the foreign exchange market, reported the ineffectiveness of these executions. They stated: “Despite the arrest and trial of many traders in the foreign exchange and mobile market, the price has skyrocketed, and there is no intention to bring it down.”

While the regime tries to curtail the economic and monetary crisis by resorting to executions and suppressing and injecting the dollar, an economic expert of the regime, acknowledging the need of the central bank to “create money” said on the state television network on November 14, 2018: In the current situation, given the events that have happened in the past, banks have no choice but to continue the process of creating money. We are now in a difficult situation and, indeed, the monetary policy of the central bank in these circumstances has to make difficult decisions, because it faces giant liquidity and inflation, more likely a rampant inflation.

He warned against the social consequences of non-responsiveness of banks, adding: If we want to close the central bank’s credit line to other banks and stop the overdrafts, it may have social consequences. Therefore, the central bank is in a difficult situation. Due to developments in the foreign exchange market, inflation expectations are highly dependent on the exchange rate. We now have a problem with inflation and a recession problem.

Inflation on the rise

But the circuit of problems and solutions does not close within the financial system of the regime. According to BBC News and Euronews, the International Monetary Fund (IMF) issued a report on Tuesday, November 13, predicting that the inflation rate in Iran will increase by 40 percent and the unemployment rate will increase from 13 percent this year to 14.3 percent next year.

According to the International Monetary Fund (IMF) forecasts, GDP growth in Iran this year (2018) will be negative by 1.5 percent and will worsen in 2019, reaching a negative 3.6 percent. These figures from economic experts are less than realistic because the International Monetary Fund sets out its report based on official government figures.

The IMF’s new report states: Given the sharp decline in oil exports, and the economy heavily dependent on oil resources, the Iranian regime will only achieve a balanced budget if the world’s oil prices are not lower than $100 a barrel. At present, the price of oil is less than $70 per barrel. Meanwhile, according to a UN agency official, one of the problems in the economy in Iran is the mismatch between the official exchange rate and the informal market price.

According to the report, US sanctions reduce Iran’s oil production and exports dramatically for at least two years. Oil sanctions will increase oil prices in the short term, but in the medium term, due to increased supply by oil producers, oil prices in global markets will decline. The price of oil is forecasted to be at $68.76 per barrel for next year and $60 per barrel in 2023 (in five years).

Brent crude that was rising above $86 a barrel a month ago now stands at around $68.

Jihad Azoor, director of the Middle East and Central Asia branch of the IMF said: Our predictions indicate that in Iran this year and next, we will see negative economic growth, prices will rise, and inflation could reach 35-45 percent depending on the level of sanctions and their impact on different sectors.

He said about the impact of the recession in Iran on the Middle East countries: The Iranian economy is not integrated with the economy of the Middle East region and is not tied together. Even after JCPOA, commodity flows and financial flows between the two sides remained very limited and so we expect a direct effect, neither in terms of business effects nor in terms of financial implications.

This is good news for the region but not a good sign for the ability of the Iranian regime to withstand these sanctions. Time will tell.