Iran dismisses sanction impact on currency

AP News
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Posted: Jan 03, 2012 7:18 AM
Iran dismisses sanction impact on currency

Iran said Tuesday that the steep depreciation in the country's currency against the U.S. dollar was not linked to U.S. new sanctions targeting its Central Bank, while officials geared up for a meeting to assess possible measures to shore up the riyal in an already ailing economy.

Since President Barack Obama on Saturday signed into law a bill that takes aim at Iran's Central Bank, the riyal hit a new record low on Monday, dropping by around 13 percent against the dollar in just two days and reaching 18,000 riyals to the dollar. The official rate, which few but the government pay attention to, is 11,180 riyals to the dollar. The currency rebounded Tuesday to about 17,000 riyals to the dollar.

The pressure on the riyal has become the latest economic blow to the country's economy, which is under several rounds of U.S., United Nations and European Union sanctions because of its controversial nuclear program. Critics have argued that President Mahmoud Ahmadinejad's stewardship of the economy has brought few gains.

The decline in the currency's value "is not related to the sanctions," Foreign Ministry spokesman Ramin Mehmanparast, arguing that the sanctions had yet to take effect. "For the time being, it has nothing to do with foreign policy."

The semiofficial Mehr news agency reported Monday that the Central Bank was planning on holding a meeting of experts to discuss the volatility in the currency markets. The meeting was slated for Wednesday.

The latest sanctions signed by Obama include an amendment barring foreign financial institutions that do business with Iran's Central Bank from opening or maintaining correspondent operations in the United States. The Obama administration, however, is looking to soften the impact of the measure, fearing they could lead to a spike in global crude oil prices or pressure key allies that import Iranian oil.

The measures add new pressure to a hardline government that has already come under tremendous pressure from the U.S. and its allies over a nuclear program the West maintains is aimed at developing weapons. Iran says its program is purely peaceful.

The standoff prompted threats last week by Iran to shutter the Strait of Hormuz, a waterway through which a sixth of the world's oil moves to market.

While few believe that Iran would actually take the step, the warnings appear to reflect Iranian officials' unease with the sanctions regime and the effect they are having on the country. Iran relies on oil exports for about 80 percent of its annual foreign revenue, and sanctions targeting its oil, or even a unilateral move by Tehran to withhold its crude from the market ,would deprive government coffers of sorely-needed cash.

Amid the international political tussle, the economic situation in the country grows increasingly less palatable for Iranians.

The official inflation rate remains at more than 19 percent, while analysts argue it is significantly higher than that level. Subsidy cuts on food and energy that were pushed through Parliament last year by Ahmadinejad are very unpopular, and economists warned long before they were enacted that they could further stoke inflation. Since the cuts were implemented, food and energy prices have spiked.

While Iranian economists, for now, argue that the latest sanctions may not be directly influencing the currency, the new measures add to already existing angst in the country.

Banking analyst Farid Ziaolmaleki, in comments echoed by others, believes that more Iranians are turning to the currency speculation, buying up dollars, as inflation has outpaced the 12 to 15 percent interest rates offered by banks.

Compounding the pressure on the riyal that such speculation could have, merchants have also taken to calculating the price of their wares in dollars, hoping for a steeper depreciation in the Iranian currency.

Economic daily Donya-e-Eqtesad wrote in its Tuesday edition that "a big portion of merchants are not willing to sell their wares, and prefer to hold onto them until" the dollar strengthens more against the riyal.

Another daily newspaper, Shargh, said that housing prices had increased by 25 percent in recent weeks because of the weakening in the value of the riyal.

Even as Iranian officials argue the current currency pressure have little to do with the latest sanctions, other note that the threat last week to choke off the Strait of Hormuz was a factor.

The warnings "cause reactions, and this was reflected on the currency," said Vahid Mahmoudi, a Tehran University professor of management.

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El-Tablawy reported from Cairo.