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January 2019, No. 90


Economy

Wrong
Exchange
Policies!


Now our biggest problem is to postpone the decision makings. The failure to take decisions on time will cause the problems to be accumulated.


Masoud Khansari,
President of TCCIMA

President of Tehran Chamber of Commerce, Industries, Mines and Agriculture referring to the current situation of the foreign currency market, believes that the government should not have fallen into the trap of making wrong exchange policies from the very beginning. He says restoration of the lost trust is the starting point for economic reforms.

It must be admitted that the potential of the Iranian economy is not weak; in terms of the GDP, Iran has the world’s 24th rank, and in terms of purchasing power per capita, again Iran stands at 18th place in the global economy. In addition, we also have a high capacity in some commodities, including oil, mines, gas and, of course, the expertise and skills that exist inside the country. Only in the area of ​​advanced technology, we face some limitations and the main reason for this of course, is the long years of unilateral sanctions.

All of this shows that there is a good chance for development in the country, but the question is, considering all these capacities, skills and capabilities, why we are unable to have a say in the field of international economy? This is a question of the economic structure and governance of the country; especially, in recent years, problems have been imposed on Iran’s economy that have made decision making difficult and slowed down the economic growth. Since the beginning of the Revolution (1979), we have experienced 20% inflation and the average growth of 2.5%. In fact, the system of the economic administration since the Revolution has been devised in a way that the country has not been managed in the form of income-expenditure. It has always been tried to run the economy by the government rather than the private sector, and as a result, the government has always borrowed from the Central Bank of Iran (CBI) to meet its cost; this has led to inflation and creation of money and has generated a defective structure which has added to the volume of debts every year and made a large and fat government that has been unable to provide its own expenses.

On the other hand, inefficiencies have imposed different problems on the economy, an example of which is the status of pension funds; the government has about 2.8 million employees; considering that retirement funds have already been forfeited and lost, the government has to pay salaries to about 9 million people. In addition, the government has expenses that have complicated the administration of  this structure and now it cannot meet the expenses. As a result, the quality of what it offers is decreasing day by day; all these problems are caused by the state-owned economy. It has never happened to see how much revenues we have so that we could adjust our expenses accordingly.

In recent years, especially since 1384 (2005/6), the problem that has been added to the dilemma is liquidity which has been growing day after day so that today it has reached 16,000 trillion rials and has further escalated the existing crises and problems, namely faulty structure and redundant government bureaucracy, government debts to the banks, to retirement funds, and to the private sector. Ultimately all of this has caused predicaments for the economy. This is the economic situation of our country, but I still think that if proper management of the situation takes place, we can spend in proportion to the revenues to at least solve some of the problems.


We must either accept the open market system with all its characteristics or establish a system of subsidies and coupons.


Now our biggest problem is to postpone the decision makings. The failure to take decisions on time will cause the problems to be accumulated. When the 12th government came into power, the price of the USD was 37,000 rials; the government intentionally or inadvertently forgot about three factors: One was that liquidity was increasing day by day. It is noteworthy that Mr. Rouhani took over the government with a liquidity figure of about 4,600 trillion rials, and now this figure has reached 16,000 trillion rials. Secondly, the government’s entire effort was to keep the price of the hard currency stable, and for the same reason, it had to resort to price suppression; this is while the CCIMA had repeatedly announced that this explosive situation would send foreign currency price up tremendously but no one paid attention.

So, if the government had applied the difference of domestic and foreign inflation on the exchange price in accord with the inflation that existed in the country, today such a situation would not occur. In the meantime, the impact of liquidity on forex prices should not be overlooked. Therefore, it is clear that the lack of timely decision-making and the failure to accept the realities of the Iranian economy have increased the problems; meantime, when expenses are more than revenues, the government prints equity bonds, refrains from paying its debts to the banks, pension funds and contractors, and in fact in a way it prints money!

In this situation, the banking system is forced to make excessive withdrawal from the CBI; if it issues equity bonds, it postpones debt repayment from this year to the next year, all of which will increase the monetary base and will leave its impact on the Iranian economy. As we can see, it has left its impact on the foreign exchange…

A clear example is the exchange rate. The study of the trend of foreign currency pricing shows how frightened we are about taking economically sound decisions. The government first announced that the price of USD will be set at 42,000 rials, which was a wrong decision; then the secondary market was to be built up and developed; that is, the government would allow the basic goods of the people to be supplied at a price of 42,000 rials and for the rest of the goods the market would take action. But after passage of a few days, the secondary market too witnessed government control and pricing; as a result, the third-party market was built which had many disadvantages. We must either accept the open market system with all its characteristics or establish a system of subsidies and coupons.

The state of the Iranian economy is now abandoned beyond control. The government cannot afford 42,000 rials for the dollar and then fail to stop smuggling because our borders are not closed and naturally foodstuff and fuel can be smuggled out of the country in abundance; so in such a situation, whatever water enters the pool it won’t be filled because demand will be higher than supply. We should either apply the coupon system for goods or allow the foreign currency find its true price and proceed under control and alongside it give the people subsidies. I think that we do not offer solutions on time and do not solve the problem gradually.

According to a poll conducted by the private sector in Tehran’s CCIMA, the respondents are very disappointed about the future of the business. Of course, this is not limited to the sanctions, but the depression and fatigue that is clearly visible in the private sector, including the manufacturer, the importer and the exporter, is indicative of the state of economic activity in the past few months. Recent problems in the field of economy, lack of decision making and contradictory decisions have had a severe negative impact on economic activists, which have led many factories to lay off a large number of their manpower. The statistics from the CCIMA show that the issue of labor force adjustment in industrial factories is very serious and I’d rather not mention these figures. This is a warning about the social status of the country, which unfortunately does not receive attention.

 

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