Iran’s cur­rency cri­sis may worsen GDP shrink­age: IMF

The Pak Banker - - Front Page -

TEHRAN

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 on Mon­day.

The IMF had fore­cast the Ira­nian econ­omy would shrink 0.9 per­cent this year based on data be­fore the rial slumped against the dol­lar, Masood Ahmed, head of the Mid­dle East and Cen­tral Asia depart­ment said in an in­ter­view. In­fla­tion may ac­cel­er­ate to 25.2 per­cent, the high­est level in four years, ac­cord­ing to the es­ti­mates.

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. The “most re­cent round of cur­rency de­pre­ci­a­tion and the as­so­ci­ated un­cer­tainty will likely have a fur­ther neg­a­tive im­pact on eco­nomic out­comes in the com­ing year,” Ahmed said. “So what we have to do now is to go back and see what is go­ing to be that im­pact and what that means in terms of the man­age­ment of the cur­rency.”

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

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 even as crude out­put plunges to the low­est in more than two decades. “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.”

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.

Even with­out a re­vi­sion in IMF’s fore­cast, this year’s con­trac­tion will be the worst since 1993 when the econ­omy shrank by 1.6 per­cent, the fund’s data show. 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 as sanc­tions re­duce oil ex­ports.

Ah­madine­jad’s crit­ics ac­cuse the gov­ern­ment of harm­ing the econ­omy through mis­man­age­ment. While the cen­tral bank’s in­fla­tion rate for Septem­ber was 24 per­cent, economists say the mea­sure may be three times higher. In re­sponse to the cur­rency cri­sis, Ira­nian au­thor­i­ties have raised in­ter­est rates on de­posits and opened an ex­change cen­ter to sta­bi­lize the for­eignex­change mar­ket.

Iran’s move to 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,” Ahmed said. The gov­ern­ment is also “con­sol­i­dat­ing spend­ing in re­sponse to lower oil ex­port vol­umes,” the IMF said in a re­port.

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