By: Amir Hussein Tavakoli, Economic Expert
Several important events marked our economic situation in 1390. In my opinion, the most important one was the return of the two-tiered exchange rate system and the discovery of an embezzlement in Iran’s banking system.
Following the era of the Sacred Defense-- during which the government was bound to interfere in the economy and all its aspects-- gradually issues such as privatization and a single exchange rate system were proposed and enforced with huge political and economic (and of course, administrative ) costs.
The return to the two-tiered exchange rate system, whether officially accepted or ignored, and limiting the import and export of foreign exchange has been, in my view, the most important economic event of 1390. The causes leading to this action are not to be discussed in this short article, but its occurrence can be studied more critically here.
Every day, 2 trillion dollars are transferred in the world in different kinds of exchanges. In doing so, appropriate administrative structures and means in national and international levels are required to efficiently function. Ease in transferring foreign exchange means ease in transferring goods and services. The easier and faster the goods and services are transferred from one country to the other, the more the economies of both countries will blossom. Transferring goods and services means higher employment, and a productive and healthy employment rate can only be achieved through a secure market and without non-economic interferences. The more the governments intensify their supervision over this issue, the more the situation leads towards non-economic conditions, hence jeopardizing the economic prosperity of the countries.
However, this does not mean that the government should not have interfered in the exchange market. While the unusual growth of the currency conversion rate encourages the market, the government is obligated to interfere and this is what happened in Iran. But the problem rests in another place.
One of the characteristics we have in our economic decision-making is that we do not make comprehensive decisions. When the decision was made to have a single exchange rate, a very important and basic issue was overlooked: to have a single exchange rate and to simultaneously have a floating currency that requires a collection of infrastructures that do not exist in our economy.
There is only one way to discover a price in a market economy: the market. A healthy and effective market is one in which various suppliers can encounter different customers and no customer or seller can single-handedly affect the totality of the market’s dealings. This is a very basic definition of the market. Therefore, our currency market has only one seller, the government, and thousands of big and small customers (buyers). On the other hand, currency has also come to be considered as a way to protect the value of one’s possessions. In this regard, foreign currency is competing with gold and it is for this reason that we have observed a rise in gold prices along with the balancing of the currency conversion rate.
Some might think that, besides the government, exporters also have foreign currency to sell. This is true, but the volume of currency from exports is rather negligible in comparison with the volume of oil money the government receives. On the other hand, due to the fact that the government’s budget depends on the currency conversion rate and the government’s ability to set this rate, in the budget or practically through the reduction of currency availability in the market, it is the government itself that determines the volume and the practical currency rate in the market. One solution could be for the government to follow the currency rate, rather than determining it. By creating a currency trade market, we have the possibility to discover the price of the currency with the help of the export currency market, and therefore the government can offer its currency according to this price. However, we need to enforce strict reforms in the budget system and in its supervision.
In any case, the strong return of the government to these matters was one of the most important events of 1390. This is not good development. One must bear in mind that the presence of government systems in the markets always lead to inefficiency and a fall in productivity, and when the economic power of the government and its size become limitless, solving this problem will be much more difficult.
Another issue which makes the year 1390 economically memorable for everybody is the discovery and disclosure of the large embezzlement in the banking network. It seems that a group of people, through the use of illegal and above-the-law means, have succeeded in opening credit lines with forged documents and then selling them in another bank. Through this method, this group was able to embezzle a few thousand billion Tomans from the banking system. The disclosure of this matter, which finally led to the removal of the experienced director of Bank Melli and the less experienced director of Bank Saderat and some other directors at different levels, made the year 1390 a remarkable year in the economic history of the country. The volume of these illegal withdrawals, as announced earlier, seems unimaginable. To familiarize ourselves with these numbers, one must bear in mind that one billion minutes have not passed since the resurgence of Islam till the present time.
Since the legal procedure of this matter has just started and its complete dimensions are not yet known to the public, the details of the case have not been disclosed. But, it can be said that undoubtedly the biggest embezzlement in the history of the country was discovered and disclosed in 1390. Let’s hope that we will never witness such matters again.
How will the year 1391 turn out? We must bear in mind that the US presidential elections will be held in 2012. This will have a great impact on the US economy, which is still the biggest economy in the world. On the other hand, problems related to the Euro zone are growing. The countries of southern Europe are faced with much more serious problems than we are witnessing. The problems associated with the economies of Italy and Spain are not much different from the economic problems of Greece. Portugal is also facing the same problems. France follows these countries with a serious economic crisis. The European Central Bank must make serious decisions for the Euro and its value. It seems now that in 1391, the US economy, with its slow growth, will have better conditions than the previous years. In contrast, the economic situation in Europe will deteriorate. Some economic observers believe that China will also be confronted with serious problems in 1391. The major drive behind the Chinese economy has been its exports to European countries and the United States, and China has somehow succeeded in maintaining its growth through an increase in its domestic consumption. Nonetheless, continuation of this, according to some observers, may not be possible. In any case, the possibility of serious problems for the economy of China in the following year still exists.
The impact of this situation on the oil and gas market, and non-growth or little growth of global production can lead to a decrease in oil and gas prices. Since a major part of our country’s income is also provided by the sale of fossil fuels, it can be expected that the government’s income through the export of oil and gas will most probably decrease.
This decrease of income necessitates that, besides supervising the economy and lowering its expenses, the government make efforts to decrease heavy costs which are a burden on the budget and the economy of the country. This means that the implementation of the second phase of regulating the subsidies is among the events which we undoubtedly have to expect soon so that, through this means and through lowering consumption, an appropriate step can be taken in better allocating the nation’s resources.