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A loan for Iran and a tragedy of a different kind

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Mon 23 March 2020

A loan for Iran and a tragedy of a different kind

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Ali dad pays

Iranian woman wears face mask when shopping for nuts (Reuters)

COVID-19 is ravaging Iran. He created pain and suffering. In response, the Iranian health system is stretching. Hospitals are running out of supplies and the sanctions-battered country’s economy appears unable to deliver what is needed to turn the tide of the spread of the coronavirus. On March 12, Iran request $ 5 billion from the International Monetary Fund (IMF) via its Rapid Financing Instrument (RFI), a set of policies enabling the global community to deal with this latest pandemic. However, the real reasons could be even more alarming: a turbulent oil market and a failing system.

Even without a pandemic, the Iranian economy is in dark days. Due to US sanctions, the Iranian banking system is isolated; its oil exports have fallen to less than 300,000 barrels per day against an average of 2,500,000 barrels per day in April 2018. However, President Hassan Rouhani administration estimated oil revenues over the next Iranian calendar year, April 2020 to March 2021, at $ 18.25 billion with an average oil price of $ 50 per barrel. Any observer knows that this is not correct.

First, the Organization of the Petroleum Exporting Countries (OPEC) failed to reach an agreement with Russia to cut production to support struggling markets. Russia and other OPEC members had been following a production deal since 2017 to support oil prices. The latest disagreement over oil strategy has caused oil prices to plummet. Due to the flooding of the market by Saudi and Russian oil producers, Iran is now caught in the crossfire, losing more revenue than expected.

Second, COVID-19 is causing the global economy to slow down. Global demand for energy, mainly crude oil, will be falling, or at best compressed. Iran, an oil exporter, weakened by sanctions and strained by rivals, may not be able to export oil to its regular customers, including China. At present, the Iranian government is unlikely to materialize the $ 18.25 billion planned for the next Iranian calendar year. The Rouhani administration needs hard currency to keep running what is in practice a welfare state with massive subsidies paid directly to consumers, and the prices of fuel, electricity and utilities kept artificially low.

It’s not just about lowering oil prices, which is frustrating for the Iranian government’s designs. Of course, the oil market is experiencing a drop in demand and a price war between two major producers, Saudi Arabia and Russia. However, this is not the first time that Tehran has lost its oil dollars due to Riyadh’s attempt to gain market share. Iran’s economy continues to suffer from structural problems and widespread corruption. Many would argue and argue that the Iranian economy is losing precious resources and much-needed capital due to a failing system. The Iranian government’s continued interference in the foreign exchange market discourages any exporter from bringing home hard-earned hard currency income.

The point is, Iran has the money; the problem is, it’s not inside Iran. Private exporters prefer to keep their income out of Iran safe from government sanctions and interference. Those who buy Iranian oil invoke sanctions and the isolation of Iranian banks. Thus, Iran’s oil revenues accumulate in accounts in China and elsewhere beyond the reach of Iranian companies and the government. Iranian Minister of Economic Affairs and Finance Farhad Dejpasand says country only brought in $ 8 billion total revenue $ 40 billion from April 2018 to March 2019. This amount represented only 20% of the revenues generated by non-oil exports, including petrochemicals. Things got better with a new system allowing exporters to exchange their hard currencies at rates closer to the market exchange rate. They can also use their income to import commodities, which they can sell at market prices. These moves prompted some exporters to close Iran’s foreign trade cycle by bringing the money they had deposited outside of Iran.

In February 2020, Abdolnasser Hemmati, governor of the Central Bank of Iran, told reporters that between April 2019 and February 2020, Iranian exporters brought in $ 22 billion from their income, including $ 7 billion in the form of imported products. It is difficult to measure the performance of Iranian exporters due to inconsistent reports. However, the Iranian customs administration reports that from April 2019 to December 2019, Iran exported over $ 31 billion, while the Tehran Chamber of Commerce has estimated total exports to be valued at $ 27 billion. Iranian exporters brought in 70-80% of their revenue, leaving $ 5-8 billion outside the Iranian banking system. Right now, the Iranian economy needs every penny to respond to the economic impact of COVID-19.

There is no doubt that the world community must find a way to help the Iranian people who have suffered the third highest number of deaths and cases of coronavirus. However, one wonders how Iran can receive any amount of money from any financial institution in the world. Even if the United States lifts its sanctions against Iranian banks and the IMF releases $ 5 billion via RFIs, the Financial Action Task Force (FATF) still has Iranian banks in its ranks. blacklist. After parliament did not approve membership in the FATF, the case was referred to the Council of Opportunity, an administrative assembly appointed by the Supreme Leader. Members of the Convenience Council did not support Iran membership at the FATF, after months of intense debate. Currently, Iran is an officially sanctioned and blacklisted country. As such, it is unlikely to receive funds through Iranian banks.

One has to wonder why the Iranian government does not use the foreign exchange market to encourage exporters to report all their income and why it has failed to reform Iranian banks and adopt the FATF recommendations. Perhaps some think it is counterproductive to have these questions answered in the midst of a national crisis. The fact is that without adequate infrastructure, especially financial, all economic activity would not produce the expected results. Crisis management is no exception. It is time for the Iranian authorities to dismantle the barriers they have created to interact with the global business community.

Ali dad pays is Associate Professor of Finance at Gupta College of Business, University of Dallas, Texas. Follow him on Twitter: @adadpay.

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