Fact Check: Has the Government manipulated foreign exchange rates to eliminate its deficit?
Fact Check: A pro-government MP claims that the government has increased foreign exchange rates to compensate for its budget deficit. How credible is this claim?
In the first week of November, the price of the US dollar reached 37,000 Rials (from a previous rate of 36,000 for each US dollar), an increase that has once again brought attention to fluctuations in the rate of foreign exchange in Iran.
Gholam Ali Jafarzadeh Imanabadi is Rasht MP and a pro-government member in Majlis. In an interview posted on Majlis’ official website, Mr. Imanabadi said that “there are times when officials increase a currency’s exchange rate in order to compensate for budget deficits, an approach that is not justified.” He asserted that “the government’s decision to increase the currency rate in order to compensate for its budget deficit will inflict a profound and fatal blow on the economy and on production.”
Mr. Imanabadi’s statement is a significant criticism of the Rouhani government because he is a supportive MP and is close to Mohammad Bagher Nobakht, head of the Management and Planning Organization of Iran (MPO), which is responsible for planning the country’s budget.
The rial’s rate of exchange against the US dollar has experienced less fluctuation and consequently more stability since President Hassan Rouhani came to power, especially when comparing the rate to the last years of Mahmoud Ahmadinejad’s presidency. However, the rial’s exchange rate showed an increase in September.
In October 2015, Vatan Emruz, a publication that is frequently critical of the Rouhani government, reported that “the government is very much eager to increase the currency rate in the black market in order to compensate for its budget deficit.” However, there there have been a number of reports in pro-government media that support such a claim. For example, Shargh Daily, reported on September 15, 2015 that the government “is planning to cut the supply of currency in the market in order to avoid a budget deficit in the current fiscal year. It also has no plans to borrow its 17 billion USD deficit from the Central Bank, or to issue bonds. As a result, it is using the rial as the only means to compensate for its deficit.”
Analysis by Economists
There is no consensus among economists on this matter. “The main objective of the government in increasing the foreign exchange rate,” says Mehdi Taghavi, a professor and economist, “is to compensate for the budget deficit projected for the next Persian fiscal year, and to provide the country with an additional source of cash.” According to Taghavi, the deficit is a result of a decline in oil sales.
By contrast, Ali Dini Torkamani is an assistant professor at the Institute for Research and Studies on Trade and has a different view of this issue. Mr. Torkamani believes that “the main goal of the government is to increase the official foreign exchange rate in order to bring it closer to the rate that is offered in the market.” For Torkamani, the government does not appear to be using currency manipulation as a tool of deficit reduction, because if that were the case then “the government should have increased the official US dollar rate up to 40% or 50% instead of the current hike to 10%.”
Reaction from the Government & Central Bank
In December 2014, a number of economic experts indicated that the government had increased the exchange rate in order to compensate for the country’s budget deficit. In response, Iran’s Central Bank released a statement rejecting the idea and announcing that the bank was determined to protect the currency exchange rate from market fluctuations, and to ensure that it is kept “within an acceptable range and supported by ‘essential factors.’” However, during the autumn of the current Persian year and in the past three months, the price of a US dollar saw an increase of 5,000 Rials, even though Iran’s Finance Minister, Ali Tayebnia, has claimed that “the ‘essential factors’ determining the price of foreign exchange have remained unchanged.”
Mr. Tayebnia has claimed that the prices of the dollar and other currencies have increased because “we are on the eve of January and the New Year and also Arbaeen [the fortieth day of a Shia Imam’s passing]; people show great enthusiasm to travel to holy cities abroad.” He has also suggested that “the implementation of an economic prosperity package and the Nuclear Deal (or Joint Comprehensive Plan of Action [JCPOA]) will rapidly increase the price of the dollar and that rates will remain reasonable.”
In his interview with Tasnim news service, Heydar Mostakhdemin Husseini, former deputy of Iran’s Central Bank, asserted that “foreign trips and Arbaeen are merely excuses that [the government] brings up to justify the currency rate hike while it is not possible that these are really the actual causes of such an increase.” Husseini is among the experts who stresses that “the government needs to increase the currency rate in the second half of the Persian year in order to supply cash and compensate for the budget deficit it is facing, since this method is one of the easiest and most convenient ways to create a monetary source for the government.”
Previous Currency Manipulation
Iran’s previous administration had increased the dollar’s exchange rate in order to compensate for its budget deficit. In a December 29, 2013 interview with Shargh Daily, Ahmad Mojtahed, chair of the Monetary and Banking Research Institute (MBRI) in Iran’s Central Bank during the presidency of Mahmoud Ahmadinejad, acknowledged this policy. Mojtahed stressed that the “previous government had used the hike in the currency exchange rate as a means to compensate for its budget deficit.” He has expressed doubt about “the amount of the financial stimulation that such policy had created in the annual budget. The figures and statistics were never officially announced, though I have no doubt that the government was implementing this method and at the same time they were selling the currency under the auspices of ‘Currency Intervention’ in the market,” Mr. Mojtahed added. Iran’s Central Bank and Ministry of Finance have not explicitly provided a reason for the hike in the prices of the dollar and other foreign currencies.
Majlis Research Centre
In December 2014, the Majlis Research Centre, a parliamentary agency that provides research support for members of Majlis, published a report entitled “A Macroeconomics Outlook on the Country’s 1394 Budget Bill.” This report is likely the only document that supports the idea that governments in Iran use exchange rate hikes as means to compensate for budget deficits.
In its report, the Centre pointed out that “in order to compensate for the budget deficit, a number of solutions have been considered in the draft budget bill for the next fiscal year, [including] increasing the exchange rate.” According to the Centre’s analysis, “increasing the exchange rate at a time when the price of oil has dropped can compensate for a decline in the government’s revenues . . . it is common to use such a tool to compensate for a budget deficit.”
However, the Centre warned Majlis about the unfavorable consequences of implementing this method and argued that “determining the exchange rate based on the government’s income requirements would ultimately result in the dominance of financial policy over monetary policy, decrease the independence of the Central Bank, and create possible fluctuations in the foreign exchange market, all of which would negatively impact economic growth.”
Gholam Ali Jafarzadeh Imanabadi has claimed that an “increase in the price of foreign exchanges is a measure that government officials have taken in order to compensate for the government’s budget deficit.”
Based on reports from media, economists, and Majlis’ own research centre, as well as the lack of transparency and accountability from the government and Central Bank regarding the reasons behind the foreign currency price hike, our assessment is that Mr. Imanabadi’s statement is “true.”