Monday , December 17 2018

IRAN STRUGGLING WITH RISING INFLATION, UNSTABLE CURRENCY

Fix it, Khamenei tells officials on crisis – Sanctions distort Iran economy

DUBAI, Oct 11, (RTRS): Iran’s Supreme Leader Ayatollah Ali Khamenei has ordered officials to urgently find solutions to ease an economic crisis spurred by the re-imposition of US sanctions, the semi-official Fars news agency reported on Thursday.

Washington reintroduced steps against Iran’s currency trade, metals and auto sectors in August after the US withdrawal from a multinational 2015 deal that lifted sanctions in return for limits on Iran’s nuclear programme. US curbs on Iran’s oil exports are set to come into force in November.

Combined with rising inflation, growing unemployment, a slump in the rial and state corruption, this has caused Iran’s economy to deteriorate. The International Monetary Fund predicts it will shrink 1.5 percent this year and 3.6 percent in 2019, before recovering slowly. “There are no problems in the country that we cannot resolve … Officials should find solutions to overcome the existing economic hardship and to disappoint the enemy by resolving it,” Fars quoted Khamenei as telling officials on Wednesday night. “With unity we can overcome all crises.”

Khamenei also said Iran could resist the pressure of US sanctions by relying on its own natural and human resources. “We need extraordinary efforts … to find solutions for those domestic economic challenges and to confront cruel American sanctions. Serious decisions should be made,” he said, state TV reported.

The reimposition of sanctions on Iran’s oil industry, the backbone of the country’s economy, will likely make matters worse. Iran’s pragmatist President Hassan Rouhani championed the 2015 nuclear deal but has been lambasted by his anti-Western hardline rivals for failing to bring economic prosperity to Iran in the years since.

“The soaring prices and the drop of purchasing power of those lower-income Iranians have put pressure on them,” Khamenei said. The cost of living has soared in Iran in the past months and economic grievances have led to sporadic demonstrations against profiteering and corruption, with many protesters chanting anti-government slogans. Iranian officials have accused arch-foes the United States and Israel, as well as regional rival Saudi Arabia and government opponents living in exile of fomenting unrest and waging an economic war to destabilise Iran.

Three people were sentenced to death last month in a drive against financial crime after Khamenei called for “swift and just” legal action to confront the “economic war” by foreign enemies. Tomato paste is not the most obvious economic indicator, but in Iran, where it is a staple that some people have started panic-buying, it says a lot about the impact of renewed US sanctions.

While Iran makes its own paste from an abundant crop of locally grown tomatoes, sanctions reimposed by US President Donald Trump since August have played havoc with supply.

A 70 percent slide in the rial this year has prompted a scramble for foreign currency that has made exports much more valuable in local terms than selling produce at home. Some shops are limiting purchases of tomato paste, which is used in many Persian dishes, and some lines have sold out as people buy up existing stock.

The government has responded by banning tomato exports, one of a raft of interventions to try to limit economic instability that has fuelled public protests and criticism of the government this year. But the tomato policy is not working. An industry representative said tomatoes were being smuggled abroad. “We have heard that trucks full of tomatoes are still leaving the country, especially to Iraq,” Mohammad Mir Razavi, head of the Syndicate of Canning Industry, said by telephone.

“They put boxes of greenhouse tomatoes on top and hide normal tomatoes at the bottom,” he said, referring to an exemption for hot-house grown tomatoes that left a loophole. It is one of many ways in which the sanctions are hurting ordinary Iranians while benefiting those with access to hard currency. “There is an emerging consensus that the economy will go through a period of austerity similar to that recorded during the Iran-Iraq war,” said Mehrdad Emadi, an Iranian economist who heads energy risk analysis at London’s Betamatrix consultancy. Jumps in prices are occurring in a range of goods — particularly imports such as mobile telephones and other consumer electronics, but also some staples.

A bottle of milk, 15,000 rials last year, now sells for 36,000. An 800-gramme (28-ounce) can of tomato paste was selling in Tehran stores for around 60,000 rials in March; it is now 180,000 rials, or $1.24 at the unofficial rate, prompting a scramble by households to stock up. The price of tomatoes has increased more than fivefold compared to last year. Signs on the shelves of some stores limit each customer to two cans. Iranian online shopping site Digikala lists the top nine tomato paste items as out of stock, and the rest as “coming soon”.

In supermarkets in Najaf in neighbouring Iraq, meanwhile, supplies of Iranian tomato paste are plentiful. Adding to the pressure is a fourfold rise in the price of cans, Mir-Razavi said. Traders importing material to make cans sought to buy dollars at a little-used official rate of 42,000 rials; authorities asked them to use a more expensive rate. The issue has delayed shipments of material to factories.

The government is mounting a campaign against price-gouging, periodically ordering shopkeepers to sell at lower prices. But some shopkeepers respond by not selling at all, believing prices will eventually rise again as the sanctions bite. Iran, a big oil producer with a diverse economy, has shown its farming, manufacturing and distribution sectors can ride out long periods of war and sanctions.

The Tehran Stock Exchange index has soared 83 percent this year as shares of exporting companies have rocketed. Urban real estate prices have also risen as Iranians plough their savings into property rather than keeping them in depreciating rials. The rial’s plunge, which in the unofficial market has taken it to around 145,000 against the dollar from 42,890 at the end of 2017, according to currency tracking website bonbast.com, may even have strengthened the financial system in one way.

Banks and pension funds have been struggling with massive debts. Emadi said the rial’s slide, to as low as 190,000 in late September, had given the government huge windfall profits on its dollar holdings; authorities appear to have injected some of those profits into insolvent banks to shore them up, he said. But while official data for the last few months has not yet been released, Emadi said he believed the economy was already in a recession that could deepen in coming months.

The International Monetary Fund predicted this week that the economy would shrink 1.5 percent this year and 3.6 percent in 2019, before recovering slowly. That would make the slump less deep than the recession of 2012, when the economy shrank over 7 percent, and not nearly as damaging as the Iran- Iraq war of 1980-1988, when it shrank by about a quarter.

The IMF also forecast the average infl ation rate would jump to a peak above 34 percent next year, briefl y returning to its level in 2013. How much the current recession resembles past periods of economic pain for Iran will depend on the extent to which Washington can use the sanctions to push other countries into cutting oil and non-oil trade with the Islamic Republic. US officials have said the sanctions will be tougher than the steps in 2012- 2015.

They aim to reduce Iranian oil exports more sharply, and to disrupt exports to Iran from trading hubs such as Dubai more aggressively. “I think the return of the sanctions has had a devastating effect on their economy and I think it’s going to get worse,” Trump’s national security adviser John Bolton told Reuters in late August. But Emadi said that if European nations succeeded in creating a special payments system permitting trade with Iran to continue, and if Tehran cracked down on endemic corruption, the economy might start recovering gradually a year from now.

In the meantime, many Iranians may continue to struggle with surging prices and an unstable currency. Peyman Mohammadian, 28, an unemployed university graduate in the western city of Andimeshk, said he had tried to protect 5 billion rials in savings by converting them into dollars last month at a rate of 183,000. Since then, the rial has partially rebounded as authorities have sold dollars to support it and threatened currency speculators with arrest. Mohammadian said this left him in a quandary.

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