President Hassan Rouhani will hope to push his reform agenda. Reuters / Stephanie Keith
President Hassan Rouhani will hope to push his reform agenda. Reuters / Stephanie Keith

The Tehran Stock Exchange was on track to close the end-March fiscal year with a 25% gain in local index terms as a remaining safe haven after the commercial currency market, a popular investment alternative, was shattered by a record plunge in February to 50,000 rial per US dollar, prompting officials to shut dozens of dealers and ban imported good-greenback use.

Central Bank of Iran governor Valiollah Seif, after keynoting the Euromoney Iran conference in Paris in the wake of major French oil and auto sector commitments, abandoned business-friendly rhetoric and vowed to work with security forces against “speculators.”

The monetary authority issued high-interest bonds in an attempt to divert leftover liquidity, as its own operations came under banking-community criticism for uneven intervention after months of bottlenecks in accessing foreign exchange.

A new electronic trading platform to be rolled out is designed to facilitate transactions, but the market has also been spooked by recent national anti-regime protests with thousands of arrests, international doubt over the nuclear pact as US President Donald Trump calls for renegotiation and stiffer sanctions, and pared ties with banks in the Persian Gulf region as a corollary to the Qatar boycott for its perceived Iran alliance.

Citizen anger has been directed at Supreme Leader Ayatollah Ali Khamenei and President Hassan Rouhani over domination of the economy by religious elements and the Iran Revolutionary Guard Corps (IRGC), while lifetime savings have been lost in unregulated financial institutions and social spending continues to decline in real terms amid double-digit unemployment.

Rouhani’s second term assigned priority to banking-crisis management, and billions of dollars have been released slowly for depositor reimbursement, bad-loan reduction, and recapitalization.

Khamenei acknowledged in a February speech the need for “justice” for low- and middle-income earners but remains opposed to dismantling state and IRGC control of the financial and industrial sectors, including in monetary policy, where the government continues to dictate Islamic “return” rates and exchange-rate unification is now indefinitely postponed.

Since the currency squeeze, the market rate recovered to 45,000 rial per dollar, as the authorities try to prevent inflation worsening from 10% and preserve 4% growth in gross domestic product mainly on a rebound in oil exports.

According to a survey commissioned by the University of Maryland, two-thirds of the Iranian public consider the economy “bad,” versus half when the six-country nuclear agreement was signed and there was an initial lifting of sanctions.

Poor management

Khamenei ordered the Guards and the rest of the military to sell off “irrelevant” assets in January without defining them, and equity investors view divestiture as inextricably linked to greater transparency, free float and corporate governance that can establish Tehran as an accepted frontier exchange and catapult placement in the World Bank’s “Doing Business” rankings. Their poor management and hard line contributed to a months-long strike at a big steel-company listing, where worker demonstrations over unpaid salaries were met with arrests.

The Industry Ministry estimates that US$180 billion in foreign direct investment is required to achieve desired 7-8% medium-term growth, but last year only $2 billion was registered. The ministry continues to blame residual US restrictions for keeping multinational banks and their clients away, even though $55 billion in credit lines were recently secured from Europe and Asia, including lenders in Austria, Italy, Belgium, China and South Korea.

Iranian banks are fully reconnected with the SWIFT cross-border payment network, and have started to apply global rules against money-laundering and terror financing created by the Paris-based Financial Action Task Force.

President Rouhani in March urged international regulatory compliance as part of a “modern Islamic system” despite a backlash from conservative lawmakers describing such measures as “disarmament.” He admitted “shortcomings,” including tens of billions of dollars in non-performing assets and fraud such as in the 2017 collapse of the Caspian Credit Institute, which helped trigger popular outrage.

Separately, municipalities such as Tehran have run up huge debts, with the capital’s annual servicing cost at $1.7 billion, according to representatives.

In the first 10 months of the fiscal year, total loans rose 8% to $100 billion, as the 2018-19 budget extended central-bank support for penalty forgiveness of overdue obligations.

The housing bank Maskan, the Export Development Bank, and Melli, the largest state-owned unit, received capital injections. Rouhani’s advisers have long advocated much bolder approaches, including a possible joint public-private-sector asset-disposal agency, but as problems fester their credibility has become a rapidly depreciating currency.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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