To dollarize or not to dollarize? This is the question that the ruling elite in Tehran is beginning to ask both in private and, increasingly, in public. At issue is to accept the US dollar as a de facto second currency of Iran at a time that the national currency, often known as the touman, continues a plummeting trajectory that enters its fifth year.
According to the newly-appointed governor of the Central Bank of Iran, Muhammad Reza Farzin, Iran has just completed its fourth year of negative economic growth and is entering a fifth year with no prospect of a turnabout for at least two more years.
Farzin blames the dismal performance on three factors: a tsunami of liquidity that has fueled inflation which, he claims, is approaching a rate of 50 percent per annum; a lack of discipline by the banking sector that it is, technically, bankrupt; and, last but not least, widespread fears about the future that have led to a seemingly insatiable thirst for US dollars at almost all levels of society. The Central Bank makes a 15 percent profit on dollars sold to semi-private banks.
In the last Iranian year, which ended on 20 March, Iranians converted much of their savings to US dollars. Farzin did not say what portion of the $16 billion in private hands was siphoned out of the country. But official figures show that private Iranian investors now feature in the top list of foreign nationals investing or buying property in Turkey, Georgia, Oman, Dubai, and, more recently, Kazakhstan.
According to Farzin, the Central Bank is knowable to provide the $65 billion that the government needs for its projected expenditure in the next 11 months. What he does not say is how much of it will come from printing more money and selling US dollars to private Iranian investors. Yet, he drops a hint that liquidity is set to grow by a whopping 25 percent in the same period.
Because, thanks to oil exports, the government is the main source of dollars, it is also the main beneficiary from the decline in the value of the national currency. This leads to a fundamental flaw in the government's economic strategy. On the one hand you need to print money to compensate for lack of growth and, on the other, you have to tame inflation to encourage investment and productivity and a return to economic growth.
For the root cause of inflation is a shortage on the supply side which cannot be compensated for by mass imports when the national currency is jittery. Devaluation, intended or not, could boost domestic production, but, as is happening in the case of Iran, increased domestic production coupled with a cheap currency encourages exports, thus aggravating supply problems at the national level.
Another factor aggravates the situation: the subsidies that the government provides in the hope of reducing the pressure that inflation exerts on families. For example, petrol and a range of petrochemical products at subsidized prices are re-exported by private companies to Turkey, Armenia and Iraq, with the proceeds converted to US dollars that seldom return to Iran.
According to official reports, petrol consumption in Iran is increasing at an annual rate of 9 percent -- an anomaly when we have negative economic growth. The reason is semi-official exports to neighboring countries to obtain US dollars. Thus, Iran is selling below-cost petrol not only to China, which has secured a 20 percent discount off the international benchmark price, but also to a number of neighboring countries.
Thanks to generous discounts, China now accounts for 30 percent of Iranian oil exports, and is slated to pass the 50 percent mark by 2028. That could create a semi-monopsony [only one buyer] in which Beijing would be able to dictate further price cuts.
Farzin and other new members of President Ebrahim Raisi's economic team are already hinting at an increase in domestic petrol prices, a move that could lead to a rerun of nationwide riots from when it was tried almost a decade ago.
The new head of the Tehran Stock Exchange, Majid Eshqi, has also hinted at dollarization as a means of encouraging domestic savers to invest in public businesses and properties scheduled for privatization. The exchange has just approved the creation of 90 new investment funds using the US dollars as a de facto currency.
That would also encourage private investors to put their savings in newly privatized businesses and properties. Between 2010 and 2015 private investors suffered massive losses because of downturns in the Tehran Stock Exchange.
Talk of dollarization as a means of taming inflation and stabilizing the economy has encouraged a number of trade unions in both public and private sectors to formally demand a scheme in which employees and pensioners' wage and salaries are calculated in dollars rather than the national currency. Because, compared to the national currency, the US dollar is more or less stable, wage and salary earners would be partially protected against the devastating effects of runaway inflation.
Raisi's new economic advisors may find it hard to persuade the ultimate decision-makers, believed to be part of the inner circle of "Supreme Guide" Ali Khamenei, to approve full-blown dollarization of the kind that helped several countries, notably Argentina, to tame inflation and return to economic growth.
In fact, the inner circle is working on a different scheme aimed at tying the Iranian economy to the Chinese, and to a lesser extent, the Russian economies. This is presented as part of a scheme by the trio to "dethrone the dollar" and reduce US economic power globally. The first step in that direction is Tehran's decision to accept the Chinese currency in payment for part of oil imports from Iran.
The trouble is that while the value of the dollar is worked out by the market, the value of the Chinese currency is decided by the Central Committee of the Communist Party. Thus, as in any monopsony, China would be able to pay Iran whatever the Central Committee decides.
Meanwhile, the inner circle is adding adjectives to its economic strategy. It started as "Unitarian" economy (eqtesad towhidi in Arabic), became a "Pure Islamic" economy, and is now presented as "Islamic Resistance" economy. To inject the dollar into that ideal mix wouldn't be easy. Still, with those who don't treat economics as a science with its own rules, one can never know.
Amir Taheri was the executive editor-in-chief of the daily Kayhan in Iran from 1972 to 1979. He has worked at or written for innumerable publications, published eleven books, and has been a columnist for Asharq Al-Awsat since 1987. He is the Chairman of Gatestone Europe.
This article originally appeared in Asharq Al-Awsat and is reprinted by kind permission of the author.