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November 2020, No. 95


Special Report

Sanctions & Foreign Currency


The prevalence of rental and export cards without identity is the outcome of a mechanism that created an exchange rate difference between the NIMA system and the free market.


In a country whose market is governed by economic logic, the return of foreign exchange from exports is obvious. But Pedram Soltani, a former vice president of Iran’s Chamber of Commerce, Industries, Mines and Agriculture, criticizes the government’s and the Central Bank of Iran’s prescribed policies to untie the knot, citing obstacles to the Iranian exporter. 

As you are aware, the President, the vice president and the CBI governor emphasized the return of foreign exchange from exports and called on exporters to bring the forex back to the country. What is the logic of this statement?

“Foreign currency shortage” is the clear answer to this question. Due to the tightening of the sanctions, falling global oil prices and the impact of the coronavirus, which has doubled the demand for petroleum products, the government’s foreign exchange earnings from oil exports have fallen to unprecedented levels. As Mr. Es’haq Jahangiri (VP) said, last year there was only $8 billion in foreign exchange earnings in the country, and this year this figure is optimistically estimated at $4 billion, which could go down to $2 billion. This figure is comparable to previous years, which usually averaged $40 to $50 billion and in some years even $100 billion. This sharp drop in government’s foreign exchange earnings has severely disrupted the country’s foreign exchange balance and made it increasingly in need of non-oil export currencies. Therefore, the main reason for such a problem is the lack of government’s foreign currency and a significant cut in the country’s foreign exchange earnings. 

But why does not the foreign currency from exports return to the country, which has become a challenge for the government? Do the obstacles posed by sanctions prevent this or economic common sense?

In a principled economy and in a country that has a stable economy and its banking system has connections and currency exchanges with various world countries, the foreign exchange earnings of the enterprises of that country must return to that country itself. This does not mean a special or unusual task, but it is like a company that sells its goods receiving revenue and money from the sale. In exports, this is due to the sale of the forex, and in an economy that is not in crisis, it will usually be credited by the buyer to the exporter’s foreign currency account.

But as for Iran, due to the severance of the banking system with the world in the last decade (apart from a few openings after the Iran Nuclear Agreement formally known as the Joint Comprehensive Plan of Action) official and legal channels for foreign exchange to enter the country have been blocked. Therefore, neither our foreign exchange trading transactions can be tracked nor there is any possibility for the forex to enter the country. There is only one way used by exchange shops to transfer money from exporter to importer via companies whose exchange offices in other countries have established for this relocation. This demand of the CBI and the government for the import of foreign exchange from exports is not a strange and unreasonable issue and is common all over the world. But unfortunately, everything in our country is out of principle and today the  CBI and the government are trying to return forex to the country by using force and law. Under normal circumstances, such a procedure should have taken place in the country, and the exporter who sold the goods or services needed to bring his money into the country and convert it into rials in order to put his capital back into the economic cycle.


An important question for government officials, who are constantly boasting about bringing in export currency (which, of course, is true), is what do they want to do to stem the flood of liquidity?


At present the exporter is doing the same but due to the strictures that took place in 1397 (2018-2019) and the sudden stroke on exports, this process went out of the way and was placed in a framework in which some people using rented trade cards exported goods without fulfilling their foreign exchange obligations. Although the foreign currency of such exports somehow reached the exporter and part of it returned to the country’s forex cycle, it did not enter the expected cycle of the CBI. The CBI expected the currency to be spent on imports, while it could return to the country’s currency cycle and be handed over to various individuals such as those migrating from the country, foreign investors and people buying houses in other countries. But this does not cure the pain of the country and the CBI. 

In addition to obstacles such as problems with financial transactions, does this difference between the free market exchange rate and the government-declared currency rate motivate the exporter to return his foreign exchange earnings to the country?

This is exactly the point of the lawsuit. The exporter must be able to sell his foreign currency at the free market rate like any other currency holder, otherwise his motivation to return the forex to the national foreign currency system will diminish. That was exactly the shock of 1397.

The exporter was told to hand over his foreign currency at the rate of 42,000 rials (for one US dollar), while at the same time the forex in the open market was around 53,000 rials and by the end of the first six months of 1397 it was higher than 110,000 rials. This order lacked logic and motivation for the exporter. After that, the NIMA system was launched and the great emphasis of the private sector was for the government not to manipulate the rates so that exporters and importers could trade foreign exchange at a balanced, optimal and competitive rate.

(Editor: NIMA rate reflects the price at which most foreign currency is bought and sold in Iran and crucially it reflects the price at which Iranian companies purchase foreign exchange in order to pay for imported goods.)

This system first motivated the exporter but unfortunately the price of the NIMA system was also manipulated and the previous routine continued, and by the end of 1398 (2019-2020), there was an obvious gap between the price of the free market and the one offered by NIMA system. This caused, firstly, not enough motivation for the exporter to transfer his foreign currency to the NIMA system, and secondly, there was a false demand from importers. The importer felt that he could buy a commodity at a forex below the real market price and trade in the market at a free exchange rate. This was an attractive deal and importers created more demand for the NIMA system than usual.

Managing and controlling this volume of demand, screening, prioritizing and delaying them was a source of corruption and trouble for the Ministry of Industry, Mine and Trade and the CBI, which led to dissatisfaction and consequent shortages in the market, because the CBI and the Ministry of Industry, Mine and Trade are not magicians to allocate the exact amount of foreign currency to a certain commodity needs to supply the market so that the market does not face a shortage in the coming months. Therefore, the difference between the NIMA rate and open market rate last year reduced the exporter’s motivation and, to some extent, reduced the amount of exports and was effective in preventing the return of part of the export forex to the country’s trade cycle. 

You mentioned rental and single-use business cards. Many believe that the issuance of such cards has created speculative incentives in some people. Is this policy effective? What are the market implications?

 This diverts the flow of trade from its professional path and, in other words, creates an abusive current that harms the national interests of the country, well-known and experienced merchants and traders, and in the eyes of public opinion, damages the exporter’s reputation. An exporter who returns his foreign currency to the country is not able to compete with a person who operates with a rental card. Because the former has to sell his forex at NIMA rates and the latter sells his at the open market price.

This competition narrows the field to the market and deprives the real exporter of the power of competition. Our problem in the country and in all these decades is that any document and license that can obtain money without capability, art, skill or competence is a corrupt and harmful document to the economy and the market.

This document can have any name, including a business card, which provides access to the rent foreign currency of 42,000 rials, and can also provide the possibility of selling export foreign currency at the free market price, or it can be a license to receive a loan with a very low interest rate. Many businesses have emerged in recent years, merely falsely and with the sole purpose of obtaining special loans with very low interest rates of 4%, in the form of paper companies or paper companies that earn income by receiving economic codes and transferring them with the motive of tax evasion.

In countries with more principled economic governance, permits are issued only for activities that are tied to human or environmental health, such as food or medicine or environmentally destructive and polluting activities. But unfortunately, our country is in a situation where the government wants to run the country with any force; a stone has fallen into the well and the government is trying to remove this stone while self-deception is not a ploy. The ruling ideology has left the country in this state and disrupted trade and exports. 

Hassan Rouhani used the phrase “foreign currency belongs to the government.” Does this statement have a legal basis?

It is better for lawyers to answer this question, but this is one of the risks that have caused a lot of damage to the Iranian economy over the years. This line of thinking has been repeated since the beginning of the (1979) Revolution, when people’s property was confiscated and it was announced that foreign trade and large industries belong to the government, until today, when we are in a tight spot they speak about foreign exchange belonging to the government. This statement of the President is neither helpful nor useful. The people who did not return their foreign currency to the country, some of them encountered problems that need help to resolved. Some exporters have their assets frozen due to the sanctions or have problems with buyers and have been badly deceived.

Currently, the situation is such that the exporter has to trust the buyers and cannot rely on letters of credit. As a result, the risk of exporting and loss of money is very high. So for this group, even if the government wants to send them to the gallows there will be no result. Others have done so in order to avoid the obligation to return the foreign currency and by using rental export cards, whose owners have generally disappeared or are uninformed persons who have been abused for a small amount of money. In these cases, too, the work of the government is very difficult, and a long judicial process must be completed, which may return a small part of the foreign currency. Therefore, this type of exposure does not work at all. The prevalence of rental and export cards without identity is the outcome of a mechanism that created an exchange rate difference between the NIMA system and the free market.

Since the winter of 1398 and with the entry of Iran in the FATF (Financial Action Task Force) blacklist and the corona pandemic, the country’s trade cycle, i.e. the return of export foreign currencies, has been disrupted more than before. Iran’s inclusion in the FATF blacklist has created more friction for export earnings, especially for distant countries. The corona epidemic also made trade difficult, and while exporters shipped goods, importers were unable to receive them due to the closure of customs or could not sell goods due to the closure of industries and factories.

These issues delayed their payment to Iranian exporters or caused disputes between importers and exporters. But these reasons and delays are ignored by the government and the CBI. In 1399 (2020-2021), these two institutions behave exactly like last year, while the situation in the country in the first three months of 1399 is not comparable to the same period last year. Recently, however, the CBI governor said that forex holders should return 70% of the currency for the time being, which seems to have noticed a deterioration in the situation. This year, exporters need more time to return the foreign currency.

Another point is that in the last quarter of 1398, we faced a fall in the prices of our main export goods. With the fall in oil prices, many of the country’s exports, such as gas condensate, energy carriers, petrochemicals and energy-dependent and oil-dependent goods, on the one hand, and as a result of the corona pandemic we witnessed lower prices of raw materials and minerals, nuts, carpets and the like on the other.

But the registration of the country’s export statistics is based on customs rates, which are determined once a year or every few years. Therefore, the customs estimate of the value of exports is more than real, and the CBI asks the exporter to return the foreign currency to the country’s business cycle at the same rate as stated on the customs declaration and does not consider the devaluation of exports. In such cases, serious problems arise and show that Iran’s foreign trade system is not designed at all to respond to these problems.

In a transparent and competitive system, each exporter enters its actual export rate on the declaration when the goods are declared and is treated accordingly. The recently published foreign trade statistics for this spring show that the value of the country’s exports has decreased by 44% compared to the spring of last year, but since this statistic is based on the same stabilization rate stated in the declarations, it must be said that the situation is even worse and the decline in exports has been at least 60 percent. 

Assuming that the exporter returns the export currency to the country can this alone cure the pain of the foreign currency crisis?

The higher the country’s foreign exchange earnings and the stronger the demand side, the more effective it will be. However, the increase in the exchange rate in Iran is not a single factor, and the increase in liquidity and double-digit inflation certainly affect the exchange rate. So part of this goes back to the forex supply in the market. Of course, the exporter’s foreign currency is mostly remittance currency and is separate from the cash currency market of Tehran. What is actually traded in the Tehran cash market is mostly under microscope and is considered by market observers.

The reason why this rate has fluctuated significantly in recent days is primarily the increase in liquidity, not the lack of export foreign currency. People wants to prevent the loss of the value of their property. The capital market, the only government-authorized investment market for the people, has also become severely inflated and the risk of its collapse has increased. Other markets, such as forex, gold, cars, and housing, are controlled by the government, and all routes to liquidity include bans, restrictions, or special controls.

In a normal economy, a large part of the liquidity should go to fixed investments (housing, buildings and machinery) and since the country’s gross fixed capital formation rate is negative and investment in the country is not done for various reasons and there is no necessary incentive, a large part of the liquidity has inevitably flowed to the stock market, raising concerns about when it will collapse. An important question for government officials, who are constantly boasting about bringing in export currency (which, of course, is true), is what do they want to do to stem the flood of liquidity?

 

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  November 2020
No. 95