Iran Feature: Is Ahmadinejad's Government Fuelling the Currency Crisis?

Our analysis at EA is that the currency crisis in Iran is driven by structural problems, mismanagement, mis-timed subsidy cuts and interest rate policies, and inflationary pressures. We do not see a plan by the Ahmadinejad Government, let alone a conspiracy, for the sudden fall of the Iranian rial.

That is not to say, however, that elements within the regime will give up a profit from the events. Those speculating against the rial --- has allegedly included officials in the Revolutionary Guards, in the Ahmadinejad camp, and in other areas of the Government --- have made a handsome sum by exploiting the gap between the "official" and "open-market" rates. And if economic crisis offers political advantage, should that be passed up?

"A Correspondent" for Tehran Bureau, while paying lip service to "fundamental structural problems" such as an excess of cash in the Iranian system, goes much farther. He/she sees a plot by the President and his inner circle to solve an immediate budgetary issue --- even if there are higher costs down the road --- while seeking a winning position in March's Parliamentary elections.

The administration proposed and got a fantasy budget passed for the current Persian year, 1390, which began last March. Its "total" budget, including spending for state-owned enterprises, grew by some 40 percent over the previous Persian year. That's huge. Now it faces a major budget deficit, in the range of $10-30 billion -- the estimates vary widely.

The administration and the Majles agreed to base that budget, largely financed by oil revenues, on an exchange rate of 1,050 rials per dollar. Iran gets paid for its oil in dollars. So how do you get more rials for dollars?

You let the rial loose, and you start selling petrodollars for free market rates way above the official rate of 1,050 rials. You let it go so far that the CBI, in a desperate attempt to close the gap between the official rate and open market rate, has turned to raising the official rate.

Voilà! You've suddenly got that budget deficit of yours plugged up (the administration has until end of February to fill it).

[Note: Ahmadinejad and the Parliament are currently fencing over the 2012/2013 budget. The Government missed the deadline, and an extension, last month for the submission of its plans and numbers; instead, it sought a two-month holding budget.]

With the Majles elections coming up on March 3, we can expect more developments. Ahmadinejad will make a strong move to boost the rial's value just before the polls. Meanwhile, he has allowed his many former friends turned foes to profit immensely from the dual exchange rate, hopefully enough to keep them satisfied to not bite at him or pluck off his candidates like feathers.

I am sceptical that there was this much planning and foresight behind the Iranian currency's sudden plummet. And I am doubly wary of the prediction of "A Correspondent" that "the rial will settle around 1,300-1,400 per dollar by the beginning of the new Persian year, March 20, probably at a unified exchange rate".

Still, this is a useful reminder that economic problems and political manoeuvres are never separated from each other. Expect more illustrations in the coming weeks.