through the backdoor from the Central Bank and selling them on the open market at an immense markup.
In recent weeks, a huge gap has opened up between the Central Bank’s official price for the dollar and the open market price. The elite who have access to dollars at the official rate are cleaning up by taking advantage of the difference, called arbitrage.
Last summer, when the open market price of the dollar shot up, the Central Bank swiftly followed by jacking up its price. In the next few weeks, the open market and official price dropped back down fairly rapidly. (See chart in the rial box on page five.)
This month, however, the Central Bank has not done the same thing. While the open market dollar price has spiked, slumped and spiked, the Central Bank has only slowly raised its price. The Central Bank dollar passed 10,900 rials December 8, 11,000 rials December 15 and 11,100 rials December 24.
On the open market, however, the dollar went from 15,300 rials on December 21, then slumped to 14,200 rials on December 23 and spiked again to 15,500 on December 26. But even at its lowest point of the past week, the spread between the official rate and open market rate was 3,150 rials, allowing anyone with access to dollars at the official rate to pocket a whopping profit of 28 percent.
At the high point Monday, the difference between the two prices was 39 percent.
US Treasury Undersecretary David Cohen said the gap between the two rates has provided an arbitrage opportunity exploited by officials and businesses affiliated with the government and Pasdaran. They are among regime elements able to obtain foreign currency at the favorable official exchange rate, he told the Senate Foreign Relations Committee in written testimony December 1.
“Ordinary Iranians are urgently seeking out foreign currency such as dollars or euros for safety, yet they are having trouble accessing hard currency, and, when they can, they have to pay the unofficial [free] market rate,” said Cohen, the Treasury undersecretary for terrorism and financial intelligence.
“At the same time, senior government officials and preferred businesses, including [Pasdar]-owned and controlled operations, are able to access foreign exchange at the official [Central Bank] rate, essentially engaging in profitable arbitrage on the back of the average Iranian,” Cohen wrote.
Iranians who don’t trust the rial are looking for some safer place to store their savings. The immediate threats they see are, first, rising inflation, which is now bumping up against 20 percent even by the official measure, and, second, the fear that new sanctions will further buffet the economy.
The Alef news website linked to Deputy Ahmad Tavakkoli, an economist who runs the Majlis research center, cited him as saying the gap between the rates “will lead to massive undue incomes at the expense of the nation’s assets.”
That will result in the “emergence of a new class of people who will have achieved greater wealth through the economy’s muddy waters and the blessings of the Central Bank,” said Tavakkoli, who has frequently criticized President Ahmadi-nejad’s economic policies.
One unanswered question is whether the Central Bank is complicit in the game, happily making dollars available for the elite’s profit-mongering, or just bumbling and stumbling, unable to figure out what to do stop the scheme.
Cohen told Congress that for a decade, until September 2010, Iran successfully supported a single, official exchange rate using hard currency earned from oil sales. He credited United Nations sanctions imposed in June, 2010, with making it hard for the Central Bank to access foreign currency to defend the rial. The plunging currency is now “fueling serious inflation, high unemployment and domestic discontent,” he said.
The assertion that the Pasdaran and senior regime members are profiting from the rial’s fall raises questions about whether sanctions are having the unintended effect, said Kenneth Katzman of the Congressional Research Service in Washington.
“Clearly sanctions are hurting the economy, but are the sanctions putting pressure on the key institutions they are intended to pressure, or could it be making the government more powerful relative to the population than it was before?” Katzman said in an interview with Bloomberg news.
Ali Alfoneh, an Iranian researcher at the American Enterprise Institute in Washington, said government institutions, including the Pasdaran, benefited from a similar currency situation during the Iran-Iraq War in the 1980s. They were given preferential access to foreign currency at an official rate, which they used both to buy weapons overseas and to sell currency on the black market, he said.
State television last week showed lines of people camped out with blankets overnight in front of state banks waiting to buy gold. President Ahmadi-nejad ducked responsibility, accusing unnamed culprits of seeking to drive down the rial and portray Iran “in a state of crisis.” But at another point he insisted, “We are not experiencing any particular problems” and boasted that Iran had record foreign exchange reserves that would tide over the country. On still another occasion, he said gold and currency fluctuations were the fault of “mischief from outside and inside Iran.”
But many analysts say Ahmadi-nejad’s mismanagement of the economy is one of the main factors destroying the rial. For one thing, he has driven down interest rates below the rate of inflation. That means savers don’t want to put their savings in Iranian banks while borrowers are eager to borrow as much as possible because they will effectively pay back less (in terms of real value) than they borrowed.
Furthermore, the Central Bank may be “printing money” to produce some of the funds the government needs to make its welfare payments to every Iranian citizen. Central Bank statistics cited in the media show the volume of rials in circulation has risen 20 percent in just the last five months.
Central Bank Governor Mahmud Bahmani has acknowledged the bank is struggling to restore stability to the currency, and has limited ability to defend the rial. Iran’s economy needs to be managed as if it were “under siege” by western countries, Bahmani said December 11.
Anyone with preferential access to cheaper dollars “will try to make profit out of this,” Scott Lucas, an Iran specialist at the University of Birmingham in England, told Bloomberg. “Whether it’s Ahmadi-nejad or the Guards, we’re talking about people making short term gains to the detriment of the long term.”
The currency disruption this past week may have been exacerbated by news reports that Iran had halted trade with the United Arab Emirates to punish it for being allied to the United States. The government was slow to deny that report, feeding the confusion rather than resolving it.
