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Iran’s Ahmadinejad ups rates to stem money crisis

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By Mitra Amiri and Robin Pomeroy

TEHRAN | Wed Jan 25, 2012 8:29am ES

(Reuters) – Iran increased bank interest rates on Wednesday and indicated it would further restrict sales of foreign currency, hoping to halt a spiraling currency crisis after new Western sanctions accelerated a dash for dollars by Iranians worried about their economic future.

“The economy minister has announced that (Iranian President Mahmoud) Ahmadinejad has agreed with the approval of the Money and Credit Council to increase interest rates on bank deposits to up to 21 percent,” the official IRNA news agency reported.

The central bank also told Iranians they should only buy dollars if they are travelling and not hoard them to guard against economic uncertainty.

New U.S. and European sanctions targeting Iran’s vital oil exports and its central bank seriously exacerbated a slide in the Iranian currency that was already under way, creating what one senior politician described as economic instability not even witnessed during Iran’s 8-year war with Iraq in the 1980s.

The West hopes the economic pressure will force Iran to curb the nuclear work they fear is aimed at making bombs but which Tehran says is entirely peaceful.

The rial started weakening after a decision last April to cut interest paid on bank deposits to a range of a 12.5-15.5 percent, below inflation which is currently around 20 percent, prompting many Iranians to withdraw savings and buy gold and foreign currency and pushing up the price of both.

The dash for those safe havens accelerated sharply after the new sanctions were announced, resulting in the rial losing 50 percent of its value against the price of dollars available on the open market in just one month.

Monday’s decision marks a policy U-turn for Ahmadinejad, who faces a political test in March 2 parliamentary election. He previously vetoed efforts by Central Bank Governor Mahmoud Bahmani to increase rates.

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Bahmani indicated the rate increase would be accompanied by further restrictions on the sale of foreign currency.

“We will provide foreign currency in any amount for people demanding it for various uses,” he said in an interview published on the website of state broadcaster IRIB.

“Travelers, university students and patients will be supplied at an appropriate rate,” he said. Importers of vital goods would also be able to buy as much foreign currency as they need.

“The government will not give foreign currency for storage,” he added, implying that Iranians will no longer be allowed to exchange their rials for hard currency unless they can prove an immediate need.

The rial’s slide is a huge risk to already rising inflation as Iran is heavily reliant on imported consumer and intermediate goods whose prices have surged as the rial has depreciated.

“Even during the war we did not witness such instability,” Alaeddin Boroujerdi, head of parliament’s foreign affairs committee, told the semi-official Fars news agency.

“Government officials and the president himself should definitely be held accountable to people and public opinion.”

Ahmadinejad’s representative in parliament – which is already highly critical of the president and may become more so after March 2 – said the new policy would burst what he called the bubble of gold and dollar prices.

“The effects of the new decision will be clear in the market very soon and the bubbles being created for foreign currency and gold will be removed,” the ISNA news agency quoted Mohammad Reza Mirtajedini as saying.

The deputy head of parliament’s economics committee criticized the government for reacting late to the crisis which he said had “no reasonable, logical basis.”

“Increasing the bank deposit interest rates is an appropriate tool for people’s investments but doing it in a hasty manner and the current inflamed situation of the market will not solve any problem,” Mostafa Motavarzadeh told the semi-official Fars news agency.

The price of 8.133-gram gold coins dropped on the news, local media reported, to 8,500,000 rials, reversing most of last week’s 45 percent increase when the price rose to 10,100,000.

The effect on the price of dollars was negligible however with ISNA saying the price had fallen on the news to 22,500 rials from 23,000 rials – still double the central bank’s official “reference rate” of 11,293 rials.

However, exchange agencies contacted by Reuters said they had no dollars to sell, reflecting either a shortage of notes or a reluctance to sell in such a volatile atmosphere.

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Iran’s currency collapse prompts fear of oil blockade, energy price spike

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Peter Goodspeed Dec 22, 2011

Iran’s nuclear push is rapidly turning into a game of chicken with the world’s economy.

Faced with the threat of growing international sanctions and unprecedented economic uncertainty — which has seen the value of its currency slashed in half in recent weeks — Iran announced Thursday that its navy will stage a 10-day naval exercise in the Strait of Hormuz starting Saturday.

The move, which increases the risk of military confrontation with the United States, may temporarily choke off world oil exports from the Middle East, drive up international energy prices and damage the global economy.

The head of Iran’s navy, Admiral Habibollah Sayyari told Iranian state television Thursday that Iranian submarines, destroyers, missile-launching ships and attack boats will occupy a 2,000-kilometre stretch of sea from the Strait of Hormuz, at the mouth of the Persian Gulf, off the southern edge of the Arabian Peninsula and into the Gulf of Aden, near the entrance to the Red Sea.

Dubbed Velayat-90, the naval war games will start Saturday and are designed to display Iran’s naval power in the face of growing international criticism of its nuclear program.

Earlier this week, U.S. Defence Secretary Leon Panetta predicted Iran will be able to assemble a nuclear bomb within a year and warned that the United States hasn’t ruled out using military force to prevent that from happening.

Hamed Jafarnejad/AFP/Getty Images

Habibollah Sayari points out locations for the war games Wednesday.

The day before Iran announced its war games, General Martin Dempsey, the Chairman of the U.S. Joint Chiefs of Staff, told CNN television that the United States is determined to prevent Iran from becoming a nuclear power.

“My biggest worry is they will miscalculate our resolve,” Gen. Dempsey said. “Any miscalculation could mean that we are drawn into conflict and that would be a tragedy for the region and the world.”

Iran says its naval war games will be held in international waters and Admiral Sayyari said there has been no decision yet on whether to close the Strait of Hormuz.

But last week Iranian Foreign Ministry spokesman Ramin Mehmanparast warned that “if the region faced a war-like situation, then everything would then become war-like.”

The Strait is a narrow 50 kilometre wide passageway through which about a third of the world‘s oil tanker traffic sails. A crucial choke point, it virtually controls Middle East oil exports.

The potential naval confrontation comes just as the United States and its allies are stepping up pressure to impose stricter economic sanctions against Iran in an effort to force it to abandon its controversial nuclear program.

In early November, the International Atomic Energy Agency issued a report that increased international fears Iran is deliberately seeking to develop atomic bomb capability and the United States and Europe immediately applied stronger economic sanctions against Tehran.

Those sanctions appear to be hurting Iran’s economy, squeezing the country’s banks and sending the Iranian Rial plunging to its lowest level against the U.S. dollar.

Washington recently declared the Iranian banking system guilty of money laundering, which has forced U.S. banks to step up the reporting requirements of banks they deal with which may be doing business with Iran. The impact has made life so difficult for foreign businesses that many have decided to stop dealing with the Iranians.

In November, Canada and Britain also decided to sever all ties with the Central Bank of Iran and France began calling for a European Union boycott of Iranian oil imports.

Earlier this month, the U.S. Congress passed the Iran Threat Reduction Act, which bans foreign banks from operating in the United States if they conduct transactions with the Central Bank of Iran.

The new array of measures have created a legal minefield for Iran’s trading partners and resulted in a significant reduction in business and investment. That in turn has sparked panic selling of Iranian currency, which has lost over 50% of its value in the past few months. The value of the rial has fallen by more than 15% since Tuesday.

As Iranian traders begin to use barter arrangements to avoid sanctions, long lines of Iranian citizens have been rushing to ditch their own currency and begun buying gold.

In the past, Iranian officials dismissed sanctions as doomed to fail, but earlier this week Iran’s Foreign Minister, Akbar Salehi was quoted in the official Islamic Republic New Agency as saying: “We cannot pretend the sanctions are not having an effect.”

The governor of the Central Bank of Iran, Mahmoud Bahmani, also told reporters that Iran needs to act as if it were “under siege.”

As Iran’s economy reels, it now appears to be trying to warn the international community it can take retaliatory steps that will reduce oil flows, drive up prices and damage the global economy, hoping that such moves may alienate other countries from following Washington’s lead.

It’s a dangerous game, because Iran itself depends on foreign oil sales for more than half its own government revenues.

National Post

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