Tyranny of numbers

On April 10, Iran instituted new foreign exchange regulations involving three changes: devaluation of the official rate by about 15 percent, restricting movement of capital out of Iran, and making the possession of foreign currency in excess of 10,000 euros ($12,500) illegal.  This policy was largely to stop the run on the rial, but rumors of capital flight may have also played a role. In particular, a claim by a prominent member of the parliament that, as reported in Al Monitor, “$30 billion of capital had fled Iran in the final months of the last Iranian year.”

I have not seen the source for the $30 billion figure, but some Iranian press reports that I have seen quote a $27 billion number from the IMF.  Most likely they refer to the latest Article IV Consultations report, published on March 29, 2018, in which this amount (-$27 billion) is listed under “Capital and Financial Account Balance” (p. 37), which ordinarily means capital outflow.  It is a projection for 2017/18, which was put together a few months before the Iranians year ended, so it is close to the actual for that year.  However, nearly all of this number is “Trade Credit,” which is above my knowledge of balance of payments accounting, but, according to people who know, is not the same as capital flight.  Capital flight is more likely to appear under “Errors and Omissions,” which was $ 7.3 billion for 2016/17, but zero for 2017/18.  The IMF has apparently decided to put what used to appear under “Errors and Omissions” as “Trade Credit”.

So, as far as I can determine, “Trade Credit” for 2017/18 includes some capital flight — how much we do not know.  This item is mostly intended to capture oil delivered to other countries but not yet paid for, hence the term “Trade Credit” to refer to oil leaving the country (counted as capital) with nothing coming back in return.  (If there is no money ever returned — as, for example, may turn out to be the case with the money owed by Babak Zanjani — then it become actual capital flight.)  Sanctions are the most likely cause of long delays between delivery of oil and its payment– or non-payment as the case may be.

It is strange to think that the recent change in Iran’s exchange rate policy was made in part based on a faulty interpretation of an item in the IMF report.  If not, I hope that someone would point me to the source for the $30 billion number.  If no one does, I will file this episode as an example of the dangers of believing what you read on the internet.  Whatever the reason, given the volatile political environment, it is a good move, though I would prefer the transactions to take place in the open, not in a black market.

It has always struck me as odd that Iran allowed private transfer of wealth abroad without any government oversight.  Most developing countries, including India, which is much better integrated into the world economy, exercise some sort of control over capital outflow.  It is especially odd to you see the Central Bank sell dollars earned by export of oil — which is national wealth, not private property — sold to people who want to buy property in the Mediterranean coast.  And sell it at a lower price for such apparently lofty reasons such as preventing the national currency from losing its value! Or in order to keep the exchange rate and therefore inflation low.  Do the people who own the oil resources agree to have their wealth spent to control inflation? I would rather get the extra money for my dollars.  Doesn’t the fact that they are returning rials to the Central Bank reducing the money supply and therefore inflation?  The government can always have two exchange rates, a low rate for importing essential goods and a higher rate, competitively determined, for taking capital out of the country.

Postscript (June 26, 2018)
I recently came across a study by the Iran’s Parliamentary Research Center (dated May 22, 2018) that estimates capital outflow for 1396 (2017/18) at $13 billion.  This is closer to my guesstimate of $10 billion than to the $30 billion figure noted above.  The PRC study, is the most careful I have seen so far on this subject, so it should settle the issue.