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Iran’s Currency Crisis May Worsen GDP Shrinkage: IMF Says

November 12, 2012

Iran Currency Crisis Likely to Worsen GDP Contraction, IMF Says

The Iranian rial has dropped about 40 percent against the dollar since August, and while the central bank’s inflation rate for September was 24 percent, economists say the measure may be three times higher. Photographer: Ali Mohammadi/Bloomberg

Iran’s currency crisis will probably deepen the Islamic republic’s economic contraction this year by more than the International Monetary Fund had estimated, the fund’s Middle East chief said.

The IMF had forecast the Iranian economy would shrink 0.9 percent this year, while inflation would surge to a four-year high of 25.2 percent. The predictions are based on data from before the rial’s slump, which “will likely have a further negative impact on economic outcomes in the coming year,” Masood Ahmed, head of the Middle East and Central Asia department, said in an interview in Dubai yesterday.

The rial has tumbled about 40 percent against the dollar since August as the U.S. and the European Union starve the country of foreign currency by blocking sales of oil, its main export. Crude output has plunged to the lowest in more than two decades.

Israel, which has accused Iran of trying to develop atomic weapons, has threatened to attack to halt the Islamic Republic’s nuclear program if sanctions don’t succeed. Iranian leaders, who insist that their atomic work is peaceful, say they won’t bow to the pressure.

“The Iranians are not going to give in on any aspect of the sanctions regime,” Theodore Karasik, director of research at the Institute for Near East and Gulf Military Analysis in Dubai, said by phone Nov. 11. “Despite negative growth and indicators, this will not affect their path.”

Ahmadinejad Summoned

Iranian lawmakers will summon President Mahmoud Ahmadinejad to question him about the plunge in the value of the currency, state-run Press TV reported Nov. 4. Ahmadinejad’s critics accuse him of mismanaging the economy.

The sanctions have curbed Iran’s influence in the Middle East. The Islamic republic counts Syrian President Bashar al- Assad, who is fighting to quell an uprising against his rule, and the Lebanese militant group Hezbollah among its allies.

“If they don’t have dollars, how can they give dollars to Assad?” Emad Mostaque, London-based strategist at Religare Hitchens Harrison, an emerging-market investment adviser, said in a phone interview today.

Iranian authorities have raised interest rates on deposits and opened an exchange center to stabilize the foreign-exchange market.

Tightening Needed

The government’s adoption of a “flexible exchange rate” needs to be supported by “tighter monetary policy and policy coordination to be able to contain the inflationary pressures that might come from it, and to ensure that there is an orderly foreign exchange market,” the IMF’s Ahmed said.

The government is also “consolidating spending in response to lower oil export volumes,” the fund said in a report released yesterday.

Iran is set to suffer its deepest recession since at least 1993, when the economy shrank by 1.6 percent, according to IMF data. The Economist Intelligence Unit, a London-based think tank, estimates Iran’s foreign reserves will drop to $70 billion this year from $80 billion in 2011.

The IMF plans to send a team to Iran in the first half of next year for regular consultations and will evaluate the country’s economy and foreign-currency reserves, Ahmed said.

No Delay

The fund has already sent a delegation to Egypt to review an economic program linked to a $4.8 billion loan request as the Arab country seeks to reduce its budget deficit and revive investor confidence. The IMF team will remain until a preliminary accord is reached, Prime Minister Hisham Qandil said in an interview yesterday in Cairo.

The timetable for an agreement depends on “how quickly on the Egyptian side feel they’re ready to move forward,” Ahmed said. “There’s never going to be a delay that comes from our unwillingness to move on it.”

The IMF has said the economic plan must enjoy broad political support in the country and urged the government to explain it to the public.

Iran earned a rare praise from the lender after a two-year national debate to begin eliminating energy subsidies in December 2010 and replace them with cash payments. The currency crisis has prompted parliament to vote in favor of suspending the second stage of the plan, the state-run Mehr news agency reported today.

The halt means that poorer Iranians, who form Ahmadinejad’s support base, now receive cash payments and partly-subsidized products, while his opponents among the country’s middle class are “bearing the brunt of the pain,” said Mostaque.

To contact the reporters on this story: Alaa Shahine in Dubai at asalha@bloomberg.net; Dana El Baltaji in Dubai at delbaltaji@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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