Iran’s Currency Wars

The recent collapse of the Iranian rial by a massive 50 per cent exemplifies eight years of economic mismanagement under President Mahmoud Ahmadinejad whose policies have stifled economic growth at home and accelerated Iran's isolation abroad.

Mid-way through his first term as president, as Iran's economy was teetering under the weight of domestic and external pressure, Mahmoud Ahmadinejad fended off mounting criticism of his policies with characteristic populist aplomb: 'I pray to God that I will never know about economics'. As he approaches the end of his final presidential term, Ahmadinejad is managing an economy that is at structural breaking point, is fiscally mismanaged, unprecedentedly isolated and yet ever-more dependent on oil as the main source of government revenue. Little wonder then that many Iranians may be thinking God has answered the president's prayers. Following a week in which the Iranian currency, the rial, has fallen dramatically-precipitating street protests-Ahmadinejad's own weaknesses have been glaringly exposed. This suggests that he is now no more than a lame-duck figurehead, outmanoeuvred by his political opponents and allies alike who are readying themselves for the post-Ahmadinejad era in 2013.

The latest assault on Ahmadinejad's credibility followed a volatile seven days on the foreign exchange markets. A precipitous fall in the rial, which slumped from a rate of IR24,600:US$1 on 24 September to around IR37,000:US$1 by 1 October, spread panic across the country. Frantic government efforts to stabilise the currency-by establishing an official foreign exchange centre selling rials at a fixed rate and by arresting some currency traders accused of manipulating the currency market-have thus far failed to stem the depreciation. The government is also seeking to monopolise all legal trade in the rial, but excluding private currency traders is unlikely to stop the rial's slide. Iran has a historically vibrant foreign exchange black market which will probably flourish further as businesses and individuals continue to convert their rial savings into dollars.

The lack of government transparency is further adding to uncertainty over the real value of the rial. The old maxim of 'lies, damn lies and statistics' holds especially true in the case of Iran: despite the turmoil in the currency markets, as of 16 October, the Central Bank website was still quoting a rate of IR12,260 to the US dollar. The Central Bank has ample resources at its disposal to intervene in the currency markets to prop up the rial by buying up more dollars. According to the IMF, official foreign reserves totalled some $106 billion at the end of 2011, some of which could be used for dollar purchases. However, the Central Bank appears content for now to allow the newly-created foreign exchange centre to manage the supply of dollars to Iranians. Given Ahmadinejad's meddling in the Central Bank throughout his presidency, there are suspicions that the Bank may be responding overly-cautiously to the currency crisis in order to inflict damage on the president. Compare Iran's current currency woes to when Ahmadinejad was first inaugurated and Iranians will be forgiven for reminiscing about the relatively better times before his arrival: in 2005 the rial was trading at around IR8,900:US$1. Over the course of Ahmadinejad's presidency the rial has fallen by a staggering 300per cent.

Economic Incompetence

The currency crisis is only the latest manifestation of the president's economic incompetence. Ahmadinejad's record with respect to economic management over his two terms is abysmal. Given the depth of Iran's reliance on oil to meet its fiscal and balance of payment obligations, the Islamic Republic's growing isolation from the global economy, through trade sanctions and restricted access to the international financial system, means that the economy is beginning to choke under the added strain. With oil accounting for over 90% of fiscal and some 80% of export revenue, that Iran's oil output is now at its lowest level since 1990-just 2.6 million barrels/day (b/d) in September 2012compared with almost 4m b/d at its peak in 2007-is an extreme cause for concern for the government.

That there is any growth at present is testament to the historically high oil price: the IMF forecasts oil export revenue of $104 billion for the fiscal year 2012/13 up from $103bn in the previous year. However, given the vagaries of global hydrocarbons prices, any significant downward spiral in prices would not just subdue growth but likely throw the Iranian economy off a cliff. Acknowledging these tough economic conditions, the president has warned of spending cuts of up to 25per cent in the current budget.

Ahmadinejad has presided over an economy that was growing at an average of 5.5% a year under his predecessor to one that is now forecast by the IMF to contract by 0.9% this year owing to insufficient domestic activity and deepening international isolation. Iran's major export markets remain under intense US pressure not to trade with the Islamic Republic. Oil exports to China, Japan, India and South Korea have already declined by as much as 20per cent while exports to the EU (once a crucial trading partner) have now been almost entirely halted. On Ahmadinejad's watch Iran's trade relations are at their worst in over two decades.

The currency crisis has further exacerbated inflationary pressures which were pretty substantial to begin with. Between 2005 and 2009 inflation averaged 16 per cent a year. Despite early successes in curtailing consumer prices, Ahmadinejad's biggest and most audacious economic reform plan which began in 2010-cutting food and fuel subsidies to millions of Iranians saving up to $20 billion from a $100 billion annual subsidy bill-has been blamed for spiking prices further. Having become president with inflation running at just below 14 per cent in 2005, official government data shows inflation currently at 25 per cent. Parliament is threatening to suspend the subsidies reform plan in response to the recent rial devaluation and the subsequent rise in the cost of basic foodstuffs and imports that is hurting Iranians across the social spectrum. With inflation on the rise, Ahmadinejad is likely to depart in 2013 without having fulfilled his biggest election pledge that he would put food on each and every Iranian dining table.

2013 and Beyond

The president, whose influence has waned significantly, is now a mere cog in a much larger political machine. Such is his marginalisation that he is resorting to threats that he will resign should his policies and plans go unapproved. Having angered senior clerics with his unorthodox religious beliefs and challenged the authority of the Supreme Leader, Ayatollah Ali Khamenei, the president's once core support base is gradually deserting him. The few friends that do remain are far too politically controversial to benefit Ahmadinejad. As such, when he departs in June 2013, he is unlikely to be missed by the top powerbrokers. 

Whoever replaces Ahmadinejad faces formidable internal and external challenges. Repairing an economy on the brink of collapse will be all the more difficult in the absence of strong international alliances. Iran's future economic development will be inseparable from its international posture. Without improvement in the latter, there is unlikely to much progress on the former. The Islamic Republic's nuclear programme will continue to dictate the terms of its relationship with the rest of the world. As global economic and financial sanctions are tightened in opposition to Iran's nuclear activities, such as the EU's announcement on 16 October that it was imposing further punitive measures against trade with Iran including banning gas purchases, so the domestic economy is likely to suffer severe bouts of instability such as the current collapse in the currency. Iran's insistence that it can develop a fully-functioning indigenous economy in the face of sanctions overlooks the country's massive reliance on the international oil market for revenue generation. Macroeconomic growth will be minimal without free access to the global economy.

Iran's oil output has already fallen below that of neighbouring Iraq, which in itself is a terrible indictment on the political leadership of the country. For the Islamic Republic to boost oil output, a revised economic policy, one which welcomes foreign investment and expertise, will be necessary. That will require a big reversal of existing foreign policy. Given that all of Iran's political factions are united behind the nuclear programme, the next president will face an extremely difficult balancing act of maintaining nuclear progress while rebuilding international trust. Global concerns over the nuclear programme will only be alleviated once Iran offers full and frank access to all nuclear sites. The Iranian president will be in no position to accede to such demands without absolute support from the Supreme Leader.

Ayatollah Khamenei's credibility took a hit with some of the Iranian public following his support for Ahmadinejad after the disputed presidential election in 2009. The Supreme Leader will therefore be extra-cautious in supporting any future presidential candidate. Given the challenges ahead, however, the next president is likely to be closely or personally associated with Ayatollah Khamenei and to have dealt with the nuclear programme on the global stage. Ali Larijani, the parliamentary speaker and former chief nuclear negotiator, fits this profile well. Larijani was defeated by Ahmadinejad in the 2005 presidential race and has used the time since not only to castigate the president for his errors but also to make alliances with senior political figures. Unlike Ahmadinejad, Larijani is no dark horse in the eyes of the Supreme Leader. Another potential candidate who has not directly expressed political interest but would suit Ayatollah Khamenei's ends is Saeed Jalili, the current chief nuclear negotiator. By having the appropriate international experience, Jalili would be in a strong position to refashion Iran's relationships, particularly with China and Russia, and be an asset in any future negotiations over the nuclear programme.

Once Ahmadinejad is gone, Iranians will be praying that his successor will be well versed in both economics and international relations. Otherwise the ticking time-bomb that is economic implosion may blow up sooner than anyone thinks.

Mohammed Shakeel is a senior Gulf economist based in Abu Dhabi.

This article reflects the author's views only