Economy, Domestic Economy

Oblivious to Reality

Oblivious to RealityOblivious to Reality

The government wants to revalue the Central Bank of Iran’s overseas assets and have the proceeds wired to its coffers. The parliament wants interest due on loans smaller than one billion rials ($28,000) forgiven.

Iran’s overseas assets are mostly owned by the CBI as the government sold them to the bank in the past. The government was paid in rials for these assets, mostly proceeds from crude oil exports and at different exchange rates.

The exchange rates, however, are far below current rates for the dollar as the rial lost over 70% of its value in the official market in the aftermath of the 2012 currency crisis. It has weakened even more since then.

This is where the government is asking for a free get out of jail card at the expense of the taxpayer. According to article 35 of the 1395 fiscal (March 2016-17) budget amendment bill, the government can revalue its overseas assets and have the central bank pay the difference to the treasury. This move would effectively erase a large part of the government debt to the CBI.

In actuality, it means disregarding commonly accepted principles of ownership. Imagine you bought a sports car from someone for $30,000 in 2001. Today, that car has a big following and is much sought after and you are offered $45,000 for it after 15 years. What would you say if the prior owner came to you and said: “Hey mate, the car is up in value, so how about you pay me the $15,000 difference?”

That is basically what the government is asking the central bank to do in this year’s budget law. It wants its debt to the central bank erased from the books.

 Body Blow

To refresh memory, the Iranian rial suffered devaluation after sanctions on Iran’s banking system intensified with the blacklisting of the CBI in 2010. As a result the CBI lost its ability to keep the rial pegged to the dollar. The poor health of the economy and bleak future prospects—ensured by profligate fiscal policies in the previous year—meant a steep loss of value for the Iranian currency.

The greenback which was exchanged at the CBI for around 9,000 rials before the currency crisis, jumped to 24,000 rials soon after. On open markets, it hit 40,000 rials in 2013. Today, the dollar is exchanged for over 31,064 rials at the central bank and 35,410 rials in the so-called open market, meaning the cash generated from the revaluation of overseas assets is huge.

Lawmakers sitting in their cozy chairs in the legislature in downtown Baherstan have taken the concept of debt pardon to heart. Since the CBI can run its printing presses at whatever speed it wants, albeit in their perception, they want it to pay all the interest overdue on outstanding loans below $28,000, according to our in-house economist Pouya Jabal-Ameli, who also serves as analyst for the regulator.

So banks need not write off these bad loans as losses. Debtors have got the cheapest loans they could ever dream of, having to pay no interest, and get off scot free from defaulting. It is all taken care of by the central bank’s mint. The CBI can keep on printing all the money it wants. The only people who pay the price are taxpayers in the form of inflation, lost jobs and holding money that buys less as each day passes.