Iran and the Temptations of Dollarization
The question of whether Iran should transition to the US dollar as a de facto second currency has been gaining traction among the ruling elite in Tehran. With the national currency, the Roman, continuing its fifth year of a downward trajectory, Iran has just ended its fourth year of negative economic growth and is entering its fifth year with no clear prospects of a turnaround. Mohammad Reza Farzin, the newly appointed governor of the Central Bank of Iran, attributes this poor performance to three factors: a liquidity tidal wave that has led to an inflation rate of nearly 50% annually, a lack of discipline within a technically bankrupt banking sector, and widespread fears about the future, which have created an insatiable demand for the US dollar. The Central Bank of Iran profits 15% on dollars sold to semiprivate banks. Given these circumstances, the debate over whether Iran should switch to the US dollar as a de facto second currency has become increasingly urgent. This decision will have far-reaching implications for the country’s economic and political future. In the last year, Iranians converted much of their savings into US dollars due to the devaluation of their national currency. According to Farzin, the Central Bank is expected to provide $65 billion to the government to cover its expenditures over the next 11 months. This has resulted in private Iranian investors investing or buying real estate in countries such as Turkey, Georgia, Oman, Dubai, and Kazakhstan. However, it is unknown how much of this money will come from printing more local currency and selling US dollars to private Iranian investors. The government is the primary source of US dollars, which it obtains from oil exports, and it benefits from the depreciation of the national currency. This has created an imbalance in the government’s economic strategy, as it needs to print money to make up for the lack of growth and tame inflation to encourage investment and productivity. This currency devaluation can boost domestic production, but it can also lead to increased exports, thus exacerbating supply problems at the national level. The worsening situation in Iran is compounded by government subsidies that offer private companies the opportunity to re-export gasoline and petrochemical products at subsidized prices to Turkey, Armenia, and Iraq. Official reports indicate that despite negative economic growth, gasoline consumption in Iran is increasing annually at a rate of 9%. This is due to the semiofficial export of gasoline to neighboring countries with the intent of obtaining US dollars. China, which receives a 20% reduction in the global price per barrel, accounts for 30% of Iran’s oil exports, with this percentage set to exceed 50% by 2028. Farzin and President Ebrahim Raisi’s new economic team have suggested an increase in domestic gasoline prices, potentially leading to countrywide riots similar to those witnessed nearly a decade ago. The Tehran Stock Exchange recently approved the establishment of 90 new investment funds, using the US dollar as their currency to incentivize local traders to invest in public businesses and properties for privatization. Talk about shifting to the US dollar to tame inflation and stabilize the economy has prompted numerous public and private sector trade unions to officially call for wages and salaries to be calculated in dollars, rather than in the national currency. The relative stability of the dollar compared to the national currency could shield wage earners from the devastating impacts of hyperinflation. This could also persuade private investors to invest their funds into newly privatized companies and properties, which had suffered huge losses in the Tehran Stock Exchange between 2010 and 2015. However, it may be challenging for President Raisi’s economic advisors to obtain approval from Supreme Leader Ali Khamenei’s inner circle for full dollarization, like the one that aided countries such as Argentina to tame inflation and re-establish economic growth. This group is instead exploring an alternative idea to peg the Iranian economy to China and Russia, to a lesser extent, as part of a strategy to reduce the US’s economic influence worldwide. The initial step toward this was Iran’s acceptance of the Chinese currency in exchange for a portion of its oil imports. The problem is that while the value of the US dollar is determined by the market, the value of China’s currency is dictated by the Central Committee of the Communist Party. This puts China in a position of monopoly power, allowing it to pay Iran any amount it sees fit. Meanwhile, the inner circle of the supreme leader has been refining its economic strategy, transitioning from an economy based on Islamic principles to one that is presented as the economy of Islamic resistance. It will not be easy to introduce the US dollar into this system, but with those who don’t regard economics as a science with its own set of rules, anything is possible. —Amir Taheri (translated by Asaf Zilberfarb)
