People lining up to purchase US dollar at a currency exchange shop on Ferdowsi Avenue. Tehran. 5 October 2010
Reports from Tehran’s currency exchange shops that line Ferdowsi Avenue indicate that due to unusually high demands for US dollar, most of the exchange shops had closed their doors, unable to meet the demands at government-imposed exchange rate. Those still opened faced long lines of customers and had to put a purchase limit of $2,000 per customer. They were selling dollar at 10,850 to 11,000 rials. The government has set the official rate at 10,650 rials and has warned the exchanged shops of losing their licenses if they sell at higher prices. The merchants on Ferdowsi Avenue were telling reporters that they had never witnessed such huge crowds lining up to buy US dollar.
Photo by Salemi, Donyaye Eghtesad
Gold, and crude hit all time highs today helped in large part by the dollar losing value. Poor Iranians, someone should tell them that their throwing their money away buying the dollar.
I bleieve most of these people are hoping that the dollar will go up again in the future and he can sell it for a profit. There is really no need for an average person who is not traveling oversees to be waiting in lines at this time for dollars.
Profit taking is certainly plying a role here, and I agree that non-traders should stay away from this highly volatile market, it is way too risky. But the problem here could be deeper than that. I am getting a sense that the merchants are losing confidence in government's ability to cope with the economic problems facing the country. The government cannot work its way out of this by issuing declarations, threats and setting up unreal exchange rates.
If the government really wants to end the subsidies, which they should, and previous governments did not have the courage doing so, then it cannot act half-heartedly, that creates the worst case scenario. They should accept high exchange rates at free market prices, and high inflation rates for a short time until structural reforms start to have serious effects on the economy.
Nader, in a perfect world maybe your ideas would work. But unleashing free market solutions on the Iranian public at this time will surely only open it up to malign foreign speculative intervention.
America is heading towards an inflationary period as the US govt has openly stated in a bid to manage its growing debt, Iranians by buying dollars are unwittingly playing into American hands. A better alternative would be to issue commodities based stocks and bonds for sale to the Iranian public.
I don't believe that the 12,500 rial rate that we saw was a real currency move. This was pure speculation. The rial like all other major currencies (apart from the US dollar) works in the same way. It is traded in the Tehran Stock Exchange and is backed by the Iranian government when needed. It would NOT be in the best interest of the Iranian economy to take away the government backing and allowing for the price to fluctuate and to dive as the government is the primary source of foreign currency holder. I also disagree with you here in that during this time of removal of the subsidy, the worst thing the Iranian government can do is allow for depreciation of the rial. This would mean twice the inflation that will come from raising prices after subsidies. A lower rial will mean imports are more expensive and things are already going to get expensive when subsidies are removed. A move like that by the State will mean committing suicide. I am sure some wouldn't mind that move.
iran next step is to put rail exchange againest dollar to the level of 5000 rail againest one dollar from now to next year to put iran ecconomy and job paid and every thing level up with europian market by end of 2011.
The issue here is not political and should not be politicized. There is a strong tendency in Iran to prevent economic reforms in the guise of defending the country's national interests. There are precisely those very national interests that require the government to bring radical reforms. Iran, like any other country, cannot afford to live beyond its means. Sooner the subsidy reforms are initiated, better off the country's economy will get. Of course there is a short term price to be paid, but that's the sign of a government having the backbone to initiate the reforms, as opposed to a government hostage to the vested interests inside the country and continue on pretending there are no structural problems with the country's economy. Let us not politicize this issue. A number of countries have successfully initiated similar reforms and are prospering as the result.
Nader, dont misunderstand me I am not trying to make it a political discussion. I am in complete agreement with the subsidy reforms going forward. I only meant that the currency does not need to be devalued.
Understood, thanks as always.
I don’t pretend to understand the mechanic of currency exchange and the way that it affects a country’s economy, but as a layperson I cannot see how the government can continue buying Rials at this rate on long term basis. I understand there may be a 25% drop in oil revenue due to Japanese sanctions. Where on earth the money to replenish the existing healthy foreign currency reserve is going to come from?
I am also a layperson when it comes to foreign currency/exchange rate. But I know one thing: defending rial at around 10,000 per dollar in the past decade has been one of government's largest subsidies. Moving to limit subsidies, but at the same time subsidizing rial heavily does not make much sense!
And just next door in Turkey ...
I think you are putting too much thought into the the currency mechanics. What all governments do to keep their currency stable cannot be called a subsidy. Iran earns throughout the year foreign currency from its exports. They MUST sell this foreign currency to a large degree for rials to pay for their budget and expenses. Now how any government keeps their currency stable is by spreading out their purchases of their own currency throughout the year to keep the price stable. A local currency is only a symbolic figure what is more important is its stabilty.
I know well that this is your field of expertise, but with respect, you have not convinced me that the government has the means and ability to sustain the Rial buying frenzy in order to ward off the currency speculators. You said “They MUST sell this foreign currency to a large degree for Rials to pay for their budget and expenses” but surely the foreign currency reserve is not a bottomless pit and if the oil export is to drop by 25% it will start depleting at an unmanageable rate. We cannot earn foreign currency by selling carpets alone – oil is our major currency earner. If I remember well there was a near parallel situation in 1992 when the UK conservative government tried hard to beat the speculators by buying Sterling at rate that it could not afford. At the end they had no choice but to leave the ERM and John Soros of this world made billions. I may be wrong, but if they cannot sustain the Rial buying then there is no choice but to introduce a two-tier currency system.
Yesterday I sent a few dollars home to my old mother via a relative and advised her to keep the dollars under her mattress until it gains it real value against Rial. I may be naïve and a fool, but my instinct tells me that this government cannot maintain the status quo for long.
Hi Anon 10:05,
Thanks for your comments. Let me explain my point like this:
Iran's total imports 2010:
50-60 billion dollars
Iran's exports 2010:
- oil 65-75 billion dollars (based on oil prices)
- non-oil 25-30 billion dollars
total exports equals 90-105 billion dollars
Iran currently covers almost half its imports through non-oil exports, it only needs around half its oil exports to cover the remaining imports bill that it has. That means that they have a large supply of extra dollars just for this year to keep prices stable not to mention the reserves of the central bank that have accumulated for the the last years of good oil prices. As I was saying earlier, Iran has to sell some of its reserves throughout the year anyway to cover the budget. By the way I have not seen anything indicating that its oil exports have been reduced by 25% but even if it were true there is still sufficient foreign currency. The Iranian government has maintained the stable rial rates over the last 10 years, as mentioned before stability is the main driver of a stable growing economy, if your local currency is fluctuating sporadically your companies are going crazy to try to hedge their foreign business. If it were to depreciate than a company in Iran would be paying more for its imports and this will be quickly reflected in stores. Also inversely, if your currency appreciates then your exports become more expansive. So stability is the name of the game!
Hope this helps!
Are international sanctions to stop amadinejad from continuing his nuclear program beginning to make an impact..?
At a rate of 1.40 to €, i guess if dollar should bounce to 1.20 again then only at the grace of the European Bank to help exports from Europe and ... meaning an artificial and temporary issue.
Gold is the best and most stable
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