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November 2020, No. 95


Partnership

Economic Commonalities
between Iran & Venezuela

Q & A with Dr. Hossein Abbasi 

In your opinion, which economic policies of the Iranian government in this period were similar to the policies that have befallen Venezuela?

I challenge your initial assumption, because I believe that the policies of the last two or three years have not driven us to a situation similar to that of Venezuela. An example is foreign currency rate policies. Although at the beginning of 1397 (2018-2019), they tried to keep the exchange rate stable, and by injecting US dollar at the low rate of 42,000 rials (for one USD) into the market, the government lost a large amount of hard currency and it was given to the people - and indeed to their “cousins” - and they did not supply goods at low prices, but today we see that even in critical situations, no one insists on the rate of 42,000 rials anymore, and this is a big positive point in my opinion. Because it shows that the government is facing the reality of limited foreign exchange resources and has not tried to control it by force, the police and the arrest of Jamshid Bismillah (a forex market manipulator).

Today we do not see anyone in the government who supports the lowering of the USD rate to 40,000 or 70,000 rials, and when the price of the dollar rises, it will digest part of the shock it has brought to the economy. Of course, I understand that the rate of 220,000 rials for one USD causes inflammation in some markets, but at the same time it takes some of the shock and eliminates one of the factors that cause the economy to become Venezuelan.

When people say “the government has increased the open market rate of the USD to cover its budget deficit, I do not know why the government does not like it. That in fact is a good policy. If the government has hard currency and it can meet part of the budget shortage by selling the USD at higher prices means printing less money; and this is good news.

When there is a shock to the economy, this shock must be taken, and if you want to keep the dollar’s rate stable, there will be a bigger shock elsewhere. During the period of 42,000 rials per USD, the government not only failed to keep the price of goods imported at 42,000 rials per USD constant, but also caused a huge shock to producers, importers and those registering orders for goods.

Government statistics showed that import orders of up to $1 billion per day were registered during that period, and this was a huge shock. Today, at least, there are no such shocks, because no one insists on the 42,000 rials rate. Even in the case of other commodities, there is little insistence on keeping prices stable. I just do not know why the government is so sensitive to housing and wants to stabilize the rates of rents. This is not feasible at all, because housing such as gasoline and bread is not supplied by the government and it is practically impossible to control its price with such policies. But overall, such policies have diminished over the years; on the other hand, the pressure of sanctions and lack of financial resources has increased sharply. 

So you think that the result of our economic policies in the last two or three years has not been inclined towards Venezuelaization of our economy, but somewhat kept our distance from that course. Am I right?

Let me sum it up in this way: Some of the policies that could have strongly driven us to Venezuelaization and we have tried them before - are no longer being tested today. Foreign exchange policy is one of them. Another good policy that has been started is the printing of bonds, which can keep the government away from financing the budget deficit and reduce the risk of Venezuelaization. Of course, this should be accompanied by a reform of the tax system in the medium term in order to generate revenue for the government and to be able to pay the principal and interest on the bonds. 

Given that Iran has once again come under intense foreign pressure since the withdrawal of the United States from the Joint Comprehensive Plan of Action (JCPOA), do you see any similarities between the economic path of Iran and Venezuela in terms of the effectiveness of the sanctions?

External pressures have certainly been effective in reducing government’s access to resources, but let me answer that question by citing some figures. When Hugo Chavez launched his protectionist policies in Venezuela, households below the poverty line in the country were about 55 percent, inflation was around 30 percent, and the “access to items” index, which represents the extent of food shortages, was 5 percent.

In 2008, after the government tightened controls on food prices, nationalized large industries and lands, and handed over control of some of them to the military, the percentage of households below the poverty line dropped to 28 percent, but the food shortage index of the household also increased by 25 percent; that is, another quarter of other items were not available.

In 2013, when Chavez was replaced by Maduro, the percentage of households below the poverty line was still around 27-28%, but food shortages had widened. Venezuela has been selling oil all these years, and interestingly, its largest trading partner and buyer of most of its oil was the United States and American companies. So before the sanctions were in place, this crisis had started. Policies to suppress production, tight control of the prices, and increase costs out of the pockets of future inflation had worked before external sanctions and pressure. Naturally, from 2015, when oil prices fell, problems suddenly opened up, and between 2014 and 2015, the food shortage index reached 75% because the Venezuelan economy was heavily addicted to oil money and imports of goods. Therefore, foreign sanctions have been effective in the problems of this country today, but they have not been the main cause.

In Iran, too, foreign sanctions have created problems and, for example, made it impossible to transfer money. But if you continue to insist on 42,000 rials per dollar rate in this situation, or you want to fight against the “high price of potatoes”, or keep the rent of housing constant, you will aggravate the problem many times over. As I have said many times, these act like two coefficients so that if the dimensions of one (sanction) get bigger, it will increase the product; but even in these circumstances, it is possible to reduce some of the effects of the sanctions by reducing another factor (domestic inefficiency and suppression of production).

 

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