IRAN’S CURRENCY WOES
Iran is in possession of the
building blocks to construct a promising, fast growing, developing economy.
The basics are all there - a
sizable population of 78 million people, with a median age of just 27. A highly
cultured and educated society, and by its own geological surveys the country is
blessed with 9% of the world's oil reserves. Utilizing a conservative IMF
calculation of $75 a barrel, that means Iran sits on $10 trillion of oil
reserves and another $3.5 trillion of gas reserves.
Iran, minus the intense sanctions
put forward by the West starting in mid-2010, would warrant a slot in the N-11
group of countries - this is the next wave of the most promising economies
within the emerging market sphere of Jim O'Neill at Goldman Sachs.
That is the promise, but the
reality today with its devalued rial is the polar opposite.
According to economist Steve Hanke,
Professor of Applied Economics, at Johns Hopkins University, the Republic is
the first country in the Middle East to ever have hyperinflation -- defined as
an economy seeing its monthly inflation rate soar 50% or more each month.
Iran joins Zimbabwe (2008) and
North Korea (2009-2011) as the only three in the 21st Century to experience
that fate and at the same time share a common link of being subject to
international sanctions.
Iranian President Mahmoud
Ahmadinejad in his United Nations address toned down the rhetoric from the
recent past and suggested the post-war institutions are not benefiting all
citizens.
"There is no doubt that the
world is in need of a new order and a fresh way of thinking," he said in
his eighth and final address to the General Assembly as President.
But that call for a new global
order may ring hollow with those struggling on the ground. With daily insights
from our reporter Shirzad Bozorgmehr in Tehran, we know that the costs of
staples in society are soaring. Chicken prices have risen three-fold in the
past year, barbari bread a five fold increase. This is directly linked to its
currency.
When U.S. President Barrack Obama
signed the sanctions legislation into law in July 2010, the rial was trading at
just over 10,000 to the dollar. It is recovering from a low last week of 37,500
on the black market, but at 28,500 the currency is still down nearly 70% in the
last year.
In 2010, Iran began removing
subsidies for fuel, from heating oil to engine petrol, which amounted to $4,000
per year for the average family of four according to the IMF. This was a sign
Iran was starting to normalize its economy and at the same time began
introducing a privatization program to reduce the size of the state. That
effort, economists say, stalled since it clashed with Iran's isolation from the
global economy due to its pursuit of its nuclear development plan.
It has been a toxic result for
the average Iranian who is caught in the middle of a "cat and mouse"
game of uranium enrichment and negotiations with the Vienna based agency, the
IAEA. All the while, the screws linked to sanctions are being tightened.
Oil makes up 90% of the country's
export earnings, but their customers have trimmed back volumes due to the
sanctions and difficulty getting systems insured. China, South Korea, Japan and
India are big customers. Beijing, energy consultants say, is using the plight
of sanctions to reduce the price they pay.
Iran's daily production,
according to OPEC, is the lowest in over two decades. It is down nearly a
million barrels a day in the last five years. The sanctions also limit any new
investment by the international oil giants who are already operating in Iran.
So the sanctions of today will leave a terrible aftertaste for years to come.
With rising import prices due to
a plummeting currency, Iran Inc. is also no longer able to compete. There are
reports that the industrial sector has laid off up to 800,000 workers this year
and those who have kept their jobs are seeing their wages eroded by
skyrocketing prices.
Meanwhile, Iranians must be
asking the question: What if we joined the global economic community, even with
its imperfections after the 2008 debt crisis? At this juncture it is far too
early to answer that question, but most would likely say Iran's isolation to
date has not been the answer to their financial woes.
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