Companionate economy and power of solidarity

Although news related to the release of dual Iranian-American prisoners and the freeing of seven billion dollars of blocked Iranian currency in South Korea has been lost in recent developments regarding nationwide protests over the death of Mahsa Amini, it continues to be at the forefront of domestic and government news agencies. The release of Iran’s blocked funds in South Korea followed intense negotiations that took place in recent weeks with the mediation of Oman, and according to news agencies, more than seven billion dollars of Iran’s assets, which have been blocked in two South Korean banks since 2018 due to US sanctions, are expected to be released. In a report published in November 2021, Kayhan newspaper announced the release of 3.5 billion dollars of Iran’s blocked funds abroad as a sign of the 13th government’s power and the bright future that has opened up for the country’s economy.

The question that arises is what impact the released funds will have on the sick and crisis-stricken economy of Iran and whether these actions can be considered a sign of Iran’s power and its central bank. First, we must examine the nature and volume of the blocked funds, and then address the economic situation of the country and the role of the central bank in this ambiguous and murky structure.

How much blocked dollars does Iran have abroad?

According to the statements of official authorities in Iran in 2021, the country has eight billion dollars blocked in Iraq, three billion dollars in Japan, seven billion dollars in South Korea, and with a slightly different perspective, twenty billion dollars in China. The large volume of these assets, sanctions, and high risk of banking transactions have forced Iran to resort to bartering in order to retrieve its money. (1)

In November 2021, Ali Naderi, the CEO of the Islamic Republic News Agency, announced in a tweet that $3.5 billion of Iran’s blocked resources have been released. This media official, affiliated with the thirteenth government, did not mention which country these resources were in. Mustafa Ghamari Vafa, the public relations manager of the Central Bank, also announced last year about the “flow of blocked resources” and said, “The process of providing commercial currency is ongoing and a portion of this one billion dollars has been allocated to the import of essential goods from recently accessible resources of the Central Bank.”

Once again, in the month of Aban 1400, Saeed Khatibzadeh, the spokesperson for the Ministry of Foreign Affairs, spoke about the existence of “multiple blocked” Iranian funds and announced that these funds are in the process of being released. Despite the fact that a year has passed since these hopeful news, the foreign exchange market is still facing serious constraints in supplying currency and it does not seem that the supply of currency is suitable and proportional to the market demand.

Iran has around eight billion dollars blocked in Iraq. On September 14, 1400, the newspaper Etemad published a report stating that eight billion dollars of Iran’s money is blocked in Iraq and due to the intensified sanctions, it is not possible to return to Iran. The newspaper then quoted Peyman Molavi, an economist and secretary of the Iranian Economists Association, to explain the amount of money, writing: “The amount of blocked dollars in Iraq is equivalent to building four ports the size of Busan in South Korea, eleven gas projects in Qatar, or building two bridges over the Bosphorus in Istanbul, or sixteen stadiums like the Emirates in London, or five airports like Singapore Airport (the best airport in the world).”

The country’s authorities have confirmed that Iran has blocked funds in Turkey; although no responsible official has said anything about the exact amount. Perhaps one reason for this issue is Iran’s confidence in its trade relations with Turkey. Mehrdad Saadat, the head of the Iran-Turkey Joint Chamber of Commerce, has confirmed that Iran has some blocked funds in Turkey and in June 2021 stated, “If the sanctions are lifted, these resources will return to the country and there will be no need to import goods against this money.”

Regarding Iranian money, there are various speculations among China about it. Some mention figures around $20 billion, but others believe that these funds should not be considered blocked. Majidreza Hariri, a member of the Iran-China Chamber of Commerce and Industries, told Trade News: “We do not have any blocked funds in China. We have had some money outside the country since 2006 and 2007. These funds are not the country’s common currency, but rather the foreign reserves of the central bank. In simpler terms, this money is the same backing as our banknotes, which is in dollars. In fact, the stored money is the same backing that we spent in rials.”

Japan has also blocked Iran’s money. The 13th President, in a meeting with the Japanese Foreign Minister who had entered Tehran for a two-day trip, requested the release of Iran’s blocked financial resources in the country, but now, despite a year passing since those negotiations, there is no news of Iran’s blocked money. Behram Shakouri, the head of the Iran-Japan Joint Trade Committee, announces that Iran’s blocked money is three billion dollars and says, “The amount of our blocked money in Japan is three billion dollars, and the Iranian ambassador to Japan and the Foreign Minister are pursuing the issue of Iran’s blocked money in Japan, and Mr. President is also involved in this matter so that we can somehow use this money.”

In any case, due to the hardships of sanctions and banking transactions, Iran is unable to obtain its blocked funds in cash until the sanctions continue. Therefore, the only solution for current officials to obtain blocked dollars is through barter transactions. For this reason, Iran has repeatedly tried to exchange these funds for vaccines or essential goods.

Freed Iranian dollars

How is it spent?

In the midst of this, the head of the Organization for Planning and Budget also announced in a new statement the government’s policy towards the way of spending the released currencies of Iran from other countries to compensate for the deficit in the country’s development and progress budget.

Masoud Mir-Kazemi, in response to a question about how much Iran’s freed currencies can help compensate for the budget deficit in other countries and in which sectors it will be spent, said: “The freed currencies are divided into three sections and will be allocated to the Central Bank, the National Development Fund, and the government to be spent according to specific policies and plans.” (2)

He stated in response to public expectations that the liberation of blocked currencies in Iran would lead to significant events in the country: “Certainly, this is the case and if a currency is freed, it will be injected into helping the progress of construction projects, infrastructure work, and solving people’s problems, and this matter is completely clear.”

The truth about blocked money.

Abbas Argoon, a member of the Tehran Chamber of Commerce, said about the impact of freeing up blocked funds on Iran’s economy: “These funds have already been spent. It is true that from the perspective of the Central Bank’s exchange rate, it can be effective and also helpful in managing the foreign exchange market, but it has already been spent and cannot be used again.” He added, “When the government has sold oil or a product, these currencies have been taken from the Central Bank in exchange for rials, and this money has also been spent and cannot be spent again.”

The member of the Tehran Chamber of Commerce continued: “This means that the government, in exchange for selling, for example, oil from the central bank, did not give dollars to the central bank because the money was blocked. However, if the money from Iran is released in countries where it is blocked, it will take the dollars and give them to the central bank, which has already received the rials.”

He continued, “However, releasing these funds helps the central bank manage the currency market and meet the market’s needs, but it is not new money that adds a new source to the government’s resources; therefore, the money is spent in exchange for rials and the government provides the foreign currency to the central bank; therefore, no specific work can be done with this money.” (3)

The government is selling its foreign currency reserves through the Central Bank auctions.

In 1399, the government obligated the central bank to pay ten billion dollars at a rate of four thousand and two hundred tomans for the import of essential goods. However, only five billion dollars were delivered to the central bank for imports, and as a result, the central bank was forced to allocate five billion dollars from its foreign currency reserves at one-fifth of the market price.

The Central Bank paid over 10 billion dollars for essential goods in 99, while the government gave 5 billion dollars to the Central Bank last year; therefore, the Central Bank has allocated 5 billion dollars more than the currency received from the government. The main question here is where the origin and source of this 5 billion dollars have been?

The government had planned to allocate eight to ten billion dollars at a rate of four thousand and two hundred tomans for the import of essential goods this year, and all of these currencies were supposed to be provided from the proceeds of crude oil exports. However, in the first six months of 2020, the amount of crude oil exports significantly decreased, resulting in a sharp decline in oil revenues and consequently a decrease in the government’s delivery of currencies to the central bank, reaching five billion dollars. However, the government had already committed to paying ten billion dollars in currencies at a rate of four thousand and two hundred tomans.

Previously, some news indicated that the Central Bank was buying currency at the daily market rate through the Nima system to supply essential goods at a price of 4,200 tomans. This method led to an increase in the monetary base and liquidity. The Parliament’s Research Center had also warned of the dangerous consequences of this action in a detailed report, but the former head of the Central Bank firmly denied buying currency from exporters and selling it at a rate of 4,200 tomans, stating that the Central Bank was using its own foreign reserves. However, it was not expected for the head of the Central Bank to approve such an action.

According to Hemmati’s statements, in fact, the Central Bank was obligated to provide currency and the Central Bank also sold its foreign exchange reserves for the import of essential goods at a price of four thousand and two hundred tomans to the importer in order to provide this credit of five billion dollars.

The follow-up from the Central Bank shows that the equivalent in rials of all blocked currencies of the country has previously been paid to the government and therefore these currencies belong to the Central Bank. Therefore, if Iran’s blocked currency is released abroad, it will still be part of the Central Bank’s foreign reserves. According to the Central Bank Law, the Central Bank is the owner of the purchased currency and since 1997, the Central Bank’s reserves have not increased from the purchase of government currencies. Therefore, any amount of currency purchased by the Central Bank from the government has been in accordance with the approved budget rate. (4)

In this way, the Central Bank in 99, upon the government’s order, allocated five billion dollars from its foreign reserves at a price of 4,200 tomans, which is more than one-fifth of the market price, for imports. This event, which took place in 99, is almost unprecedented during the Central Bank’s period of activity; because the government had never before obliged the Central Bank to sell its foreign reserves at one-fifth of the market price.

The incident that occurred in 1999 showed that the Central Bank does not even have the ability to manage its reserves and resources, and the government has been able to take control of the Central Bank’s foreign exchange reserves. If in the decades of the sixties, seventies, and eighties, the Central Bank allocated foreign exchange at a lower price for the import of some goods, these currencies were the same ones that the government had purchased and paid for imports with a resolution; in fact, these currencies were not transferred to the foreign exchange reserves.

This is not the first time that the government has sold wood to the Central Bank’s assets. The government has always looked to the Central Bank as a safe haven and a secure fund to compensate for its shortcomings and inefficiencies in managing the country’s monetary and financial affairs. Earlier in late December 2017, the government of Prudence and Hope decided to pre-sell coins, through which a total of 62 tons of gold from the Central Bank was sold in the form of 7,650,000 coins, at a price range of 1,500,000 to 1,475,000 tomans.

This pre-sale continued until April 2018, when the price of gold reached over 4.6 million tomans by the end of the year. In other words, the value of 62 tons of gold at the Central Bank increased by almost three and a half times in less than a year. Now, the price of gold is in the range of 10 million tomans.

This is while, according to the member of the Assembly of Expediency, blocked dollars are considered part of the Central Bank’s assets and the government cannot use this money. According to Mosbahimoghaddam, the government’s budget deficit in 1399 was equivalent to 450 trillion tomans and the government borrowed from the Central Bank at the beginning of last year to pay its employees’ salaries.

Masbahi Moghadam added: “We have filled and continue to fill our holes with the money we have received from England or other countries. We want to get the country’s economy on track. Mr. Rouhani has created a pit in the way of this train, and the goal of the thirteenth government is to fill these pits. In previous years, it was assumed that a significant portion of our blocked currencies were in the possession of the government, and the government sold these currencies to the central bank; meaning that it received the equivalent in rials from the central bank. Therefore, even if these currencies are freed, they belong to the central bank, not the government; meaning they are part of the central bank’s assets; thus, these currencies are not something the government can use. These currencies are for the credibility of the central bank at the World Bank.”

Despite the statements made by Masbahimoghadam regarding the Central Bank’s reliance on freed dollars at the global level, the question that arises is how an institution that lacks sufficient authority and independence in its own country can gain credibility at the international level?

The Central Bank is at the service of combating poverty and corruption.

The current banking system of the Islamic Republic of Iran is a combination of laws from the pre-revolution era and subsequent changes (especially the “Monetary and Banking Law of the Country”, passed in July 1972) as well as laws passed after the revolution, with the “Interest-Free Banking Operations Law” being the most important of them. (5)

With this unstable legal foundation and the catastrophic collapse of the Iranian banking system, which in the 1960s had a shining position in the developing world, has now turned into a ruin. We can see the roots of this collapse, especially in the Central Bank’s developments, which, unlike what happened in most of the world in the past forty years, could not achieve even relative independence and fell into the abyss of inefficiency, lack of transparency, and unresponsiveness, becoming a destructive factor in the country’s economic and social life.

In all industrial poles of the world (America, Eurozone, England, etc.), the independence of the central bank is equipped with the same strength and credibility as the independence of the judicial system or the principle of separation of powers. The increasing number of developing countries in the past forty years has recognized the independence of the central bank as the most effective way to combat the scourge of inflation.

On the other hand, if the central bank does not have the necessary authority, it will inevitably surrender to the demands of a powerful and expensive government; by providing for the budget deficit of the government through printing banknotes (or similar methods), regardless of economic realities, it increases the volume of cash in society, undermines price stability, devalues the national currency, and erodes trust both domestically and internationally.

This is the situation that the Central Bank of the Islamic Republic of Iran has been trapped in and due to its weakness, it submits to the pressures of the government and the Islamic Consultative Assembly. If inflation rates in Iran have been in the double digits for the past four decades, except for exceptional cases, and have recently reached over forty percent (based on official figures), the main reason can be found in the lack of independence of the Central Bank. In other words, the Central Bank of the Islamic Republic of Iran, with its policies in the monetary field and its heavy defeat in the fight against inflation, has been one of the main factors in the decline of Iranian society in the whirlpool of poverty over a forty-year period.

If Iran’s national currency has become so worthless in the past four decades and has taken its place among the weakest currencies in the world, the main responsible party is also the Central Bank of the Islamic Republic. “Managed floating currency” which is the official policy of the Central Bank in managing the country’s international position, has undermined the Iranian society’s trust in the national currency, which is the main pillar of economic sovereignty of any country, and has opened the way for the dollarization of the country; meaning that it has replaced the green notes of America as the basis for determining the real value of goods or savings.

And finally (a point that is sometimes forgotten), the role of the Central Bank of the Islamic Republic in the spread of corruption and the creation of social inequalities. In the past forty years, the country’s banking system, which is regulated by the Central Bank, has essentially become a huge rent-seeking machine for the influential and the “privileged”. Considering that interest rates in Iran are negative (as they are lower than inflation, except in exceptional cases), those who have access to banking facilities easily gain a large rent. Consider a privileged individual who, fifteen years ago, used their connections to borrow twenty billion tomans from a bank, used this money in the foreign exchange market, and deposited the purchased currency in foreign banks.

In other words, the policy of the central bank in the field of interest rates and artificially maintaining the exchange rate (through injecting currency into the market) has provided the grounds for the influential minority to gain a large and effortless rent in the country. In fact, the institution that should be the people’s trust has become a lever for the spread of poverty and corruption.

Notes:

1- “Where is Iran’s economy heading with the newly freed dollars?,” Imna News Agency, 19 Mehr 1401.

2- The purpose of Iran’s liberated dollars is the world of economy, 29 Farvardin 1401.

3- The truth about blocked funds that we constantly forget, ILNA news agency, 25 Dey month 1400.

4- How the government fell into the trap of printing money, the sound of the stock market, 3 Mehr month 1401.

5- Full text of the Islamic Republic Banking Plan, Tasnim News Agency, 18 Ordibehesht 1398.