The phenomenon of dollarization has yet to emerge in Iran’s economy, i.e., the rial is still being used in transactions, though the daily increase in prices affected by the value of US dollar indicates a weaker form of this phenomenon.
Some government officials talk of cutting the umbilical cord of Iran’s economy from the dollar to solve this problem. In other words, as the dollar is the basis of pricing, the solution is to eliminate it altogether. But first, how do we sever this umbilical cord? And secondly, is the adjustment of prices with the value of dollar to blame for its impact on the lives of Iranians, or the weakness of policymaking that has led to economic instability and made economic players resort to this mode of pricing? Pouya Jabal-Ameli, an economist, prefaced an editorial for the Persian daily Donya-e-Eqtesad with these questions. A translation of the text follows:
In response to the first question, the government has mostly pursued two approaches. The first has been to price various products, from cars to raw materials, below the open market rate. These factory prices allow governments to claim that they have stopped a price increase. But they have given rise to huge rent-seeking practices, whose main beneficiaries are government and state institutions.
Let’s take a look at the most recent related case: A member of the Majlis Article 90 Commission suggested that the special inspector of the president submit a report on the cars handed over to the Presidential Office and ministries. In the absence of sufficient funds to pay to its employees, the government has allocated the rent resulting from command pricing to them. As state institutions benefit from command pricing, the problem won’t go away in Iran’s economy.
The second way to remove the dollar from the economy by the government is being pursued under the framework of bilateral agreements. This has been the case more or less for two decades, but of no avail. First, they assumed that these agreements were a tool to circumvent the US sanctions, later it became clear that the sanctions themselves caused the failure of bilateral agreements.
On top of that, most of the currencies that Iran’s commercial sector depend on today, such as the UAE dirham, is pegged to the US dollar. Therefore, fluctuations in the exchange rate of rial to dirham match the changes in the rial-dollar exchange rates. Therefore, the move will fail to produce the desired result.
We believe that there is a solution to prevent the dollarization of the economy, which is different from the government’s tactic and responds to the first question of the article.
Restoring Stability to Domestic Economy
Iranians are not besotted with the US dollar; their only problem is that Iran’s economy has suffered constant instabilities and the dollarization is only a natural reaction to damage inflicted on economic enterprise. This process will end when Iran’s economy stabilizes.
Although stability and sustainable economic growth will not be achieved without the removal of sanctions, this does not mean that budgetary and monetary policymakers cannot do anything.
Accepting Market Realities
By accepting the open market rate of foreign currencies and oil sales, as well as reducing a significant portion of current expenditures, it will be possible to have a more balanced budget with less inflationary consequences even in the current situation. The current challenge of monetary policymakers is that they are unable to control expectations that have fueled widespread monetary demand as a result of the low interest rate.
Given that money supply responds to any type of demand and is accommodative, the growth of money is continuing uncontrollably. Measures to close the balance sheets of banks have not been able to stop this accommodative process.
Besides, policymakers cannot ask banks to close their balance sheet when the government itself is unable to do so. We believe that the only way to stop the growth of monetary aggregates is by limiting the expectations of the demand side.
The only way to reduce inflation is by devising a plan to increase the policy interest rate [and consequently the rate of the banking system] and giving a clear perspective of the rate increase in the coming months to people; that’s what the central banks of the world did in the past two years.
Tapping into these capacities can prevent the economy from falling into the trap of higher inflations and excessive focus of economic agents on the dollar.
