Rial devaluation and inflation — without the hype
For the past several weeks, the rapid fall of the rial has been linked to hyperinflation and a possible quick end to the impasse in nuclear negotiations with Iran. Inflation estimates of 196% per year in NYT, 70% per month in Boston Globe, and similar reports in Washington Post and Bloomberg, were all traceable to an article in the Cato website that had prematurely added Iran as the 48th worst case of hyperinflation in the world. Some commentators could hardly hide their joy in the prospect that sanctions were finally, and mercifully, about to spare the Middle East yet another war and the Iranian people years of suffering under sanctions. But these predictions have failed to materialize, and the media interest in the issue has waned. We are slowly hearing the other story of the rial devaluation, its positive effect on local production (see, for example, Jason Rezaian’s informative report in Saturday’s Washington Post).
More on the falling rial
I have not been able to write much on this blog because I have been trying to catch up on my research. But the rial troubles in the last two weeks have been impossible to ignore. I am not a macro economist, but some of what the media was reporting about the freefall of the rial even I knew was over-sensationalized — hyperinflation, economic collapse… and one Iranian BBC reporter said he had run out of words to describe it! Yesterday I tried to explain on the lobelog three things. (more…)
Lost in translation: A quick note on exchange rate policy in Iran
Something important was lost in translation in an article of mine published in yesterday’s Donayey Eghtesad, which discussed the dual exchange rate system in Iran, and which I needs to correct. The article discusses the perils of the two tier-exchange rate policy, emphasizing the difficulty of preventing inefficiency and corruption when the Central Bank provides foreign exchange at a discount of 80% relative to private sellers. Who should be getting the discounted dollars and euros is a task no government should undertake, unless under emergency conditions. Iran has been under emergency conditions for the past several months, so exchange rate unification may not be the most important objective to pursue; having enough foreign exchange for basic imports and fighting inflation are. (more…)
Sounding the wrong school alarm in Iran
A series of articles published three weeks ago (Wednesday May 9, 2012) in Donyayeh Eghtesad (DE) reported on a “shockingly” large number of Iranian children who are “deprived of access to school”. Iran has very serious education problems, but lack of access to school is not one of them. The quality of education is poor and returns to formal schooling below the university level are low, prompting discouraged youth to leave schools after age 14 at alarming rates. At the same time, 99% of children are enrolled in school by age 7 and persist at a high rate until age 14 (first year of high school). This is when the realization sinks in that staying in school will not earn them a place in a good public university or the school officials tell them they are not fit for academic work and must choose between two losing options: vocational education or kardanesh. Why waste three more years of studying when the end result is a high school diploma that has not been of any value for several decades? Trying to get these kids to stay in school, as the articles in DE seem to prescribe, without doing something about job prospects after graduation serves no individual or social purpose. The problem for these kids is not lack of schools, or even boring classes: it is lack of purpose. The education system on its own cannot deal with this problem; it is a problem for the larger economic system.
Policy reversal on interest rates in Iran: Is it enough to revive the rial?
After weeks of wrangling, on Wednesday, January 25, President Ahmadinejad has consented to the request from his Central Bank to sharply raise interest rates (officially referred to in Iran as “the rate of profit of banks”), from 12.5% on one-year deposits to over 21% and higher. The argument for increasing deposit rates is simple macroeconomics: when interest rates are below the rate of inflation, as they have been in Iran for the last two years, people will try to protect their savings by shifting their money to other liquid assets, such as foreign currency and gold. According to some reports, this theory was put to a quick test when the price of dollar and gold dropped on the same day that the hike in deposit rates was announced. At the same time, the Central Bank has announced that it will unify the exchange rates at 12,260 rials per dollar, which is an official devaluation of less than 10%. But, as welcome as these pragmatic steps are, they may not be enough. Higher interest rates will do some good, but are unlikely to lower the market exchange rate to the new official rate. These are complicated times in Iran and simple macroeconomics may not apply. (more…)
The fall of the Iranian rial: too much of a good thing?
In Tehran’s volatile currency market the rial fell to its lowest level ever today (January 2, 2012), the US dollar closing above 17,000 rials. The devaluation of the rial that started at a gradual pace over a year ago, and was largely expected and welcomed by economists, accelerated, going from less than 11,000 to around 15,000 rial per dollar in a matter of weeks. The additional fall in rial of about 10% in the last two days raises the question if the correction has gone too far. To answer this question one needs to have some idea of what is the right rate of exchange for Iran’s currency, something that you are unlikely to find in standard economics textbooks. There are two reasons why the market clearing price is not a good guide to the value of the rial: sanctions and oil.
Anniversary blues for subsidy reform
The anniversary of the subsidy reform, on December 20, 2011, arrived with fireworks, but not the kind the government had hoped for. In a day that President Ahmadinejad was addressing a conference of the first anniversary of the subsidy reform in Tehran, the rial fell by more than 5%, breaching the psychological 15,000 rials per dollar barrier. These two events are more than coincidentally connected. The rial has been weakened by the inflation unleashed by the subsidy reform, a cost of the reform that was both foreseen and justified. At the same time, the precipitous devaluation of the rial adds to uncertainty and macroeconomic instability that can undermine the subsidy reform. The real benefit from the reform derives from reduced demand for energy, which can only happen if households and firms are willing to change their behavior and invest in energy saving equipment, which in turn requires confidence that the post-reform energy prices will not be washed up in some cycle of inflation and devaluation. Remember, unsubsidized energy prices are equal their world prices multiplied by the exchange rate. With 15,000 rials to the dollar, gasoline (at 4000 or 7000 rials per liter) is 50% cheaper than it was a year ago when the new price was set, and is once again subsidized. (more…)
Iran’s place in the world distribution of income: an update
My post by the same title a year ago that featured a graph developed by Branko Milanovic was the second most visited post on this blog last year (after one on Iran’s energy subsidies), receiving 912 views. So when I learned last week that he has been working on an update of his analysis of the world distribution of income, I requested an updated graph. Branko was the keynote speaker at an Economic Research Forum conference that I attended in Cairo, where he was introduced as “Mr. Inequality”. His new results show that Iran’s position in the world distribution of income improved between 2005 and 2008, something that should surprise no one since during this period Iran was the recipient of about $200 billion worth of transfer from the rest of the world as oil income. (more…)
Taking the surprise out of Iran’s low unemployment rate
The fact that after a long hiatus the Statistical Center of Iran (SCI) has decided to publish the results of its quarterly Labor Force Survey should be welcome news but instead it has been met with controversy and disbelief. The new report for summer 1390 (2011) shows a surprisingly low unemployment rate of 11.1%, down from 13.6% the same quarter a year ago. In the absence of data on the Gross Domestic Product (GDP) from the Central Bank in the last 3 years, analysts were hoping to find answers to questions about the economy’s health from unemployment data, but instead they were disappointed. Many reports, including one interview with a former SCI deputy director, dismissed the data as cooked. A closer look shows they are right to be skeptical of the lower unemployment rate, but not to question the survey’s veracity. Based on the published report I argue that the actual rate of unemployment maybe as much as 40% higher than what has been officially reported. (more…)
The trouble with rial
Iran’s currency, the rial, is about to change if not disappear altogether. Iran’s Central Bank is seriously considering taking 4 zeros out of the embattled currency, and even changing its name, perhaps to something Persian sounding like parsi. Neither of these two actions, if they come to pass, deal with the real trouble with rial. I am all for taking the zeros out, and could go along with the name change if that would help people forget that the new rial is the old rial 160 times less valuable (compared to 1977).
Tyranny of numbers 
19 comments