Rial Devaluation Lifts Iran's Trade Balance

EghtesadOnline: Much as the Iranian national currency's steep devaluation in recent months gave rise to challenges, it has also provided a boost to the country's trade balance on the back of surging exports and dwindling imports.

News ID: ۷۴۶۱۴۶

24 October 2018

Before May, when US President Donald Trump was expected to withdraw from Iran's nuclear deal with world powers, the rial started losing value against other currencies due to the psychological perception of worsening conditions.

The national currency lost about 75% of its value and reached an all-time low of 190,000 against the US dollar in late September. It has since regained some lost ground thanks to government intervention and now stands at about 140,000 against the American greenback.

This has created a myriad of issues from fostering an atmosphere of uncertainty toxic to stable economic endeavors to rising inflation, Financial Tribune reported.

However, a look at official data for the first six months of the current fiscal year that ended on Sept. 22 shows Iran's trade balance has significantly benefited from a weaker rial.

According to latest data released by the Islamic Republic of Iran Customs Administration, Iran exported $20.46 billion worth of non-oil goods during the first half of the current year, marking a notable increase of 13% compared with the $23.12 billion registered during the corresponding period of the year before. This is while 56.64 million tons were exported, indicating a 3% decline in terms of weight.

On the other hand, imports to the country in the same period totaled $22.18 billion, down by about 12% compared to the $25.18 billion worth of goods imported during the first half of the previous fiscal year. The total import of 16.22 million tons of goods showed a decline of 9% year-on-year in terms of weight.

By “non-oil”, IRICA refers to all commodities, excluding crude oil. So oil byproducts and petrochemical products are still categorized as non-oil. IRICA categorizes non-oil exports into three groups of petrochemicals, gas condensates and “other items”.

The country's total foreign trade during that period, $45.3 billion, actually indicated a 0.7% decline YOY. However, Iran saw a trade surplus of about $940 million. This is especially significant since Iran had witnessed a trade deficit of $472 million last year.

Double-Edge Sword

Prior to recent currency fluctuations, private sector businesses and their representatives i.e. the chambers of commerce had long criticized the government's practice of artificially maintaining the value of a rial that they believed should be much lower.

On the other hand, they blasted the government for the dual-tiered foreign exchange system that has long plagued Iran's economy.

A year ago, Iran's rial was traded for about 38,000 rials to the US dollar in the open market and about 32,000 rials at the official government rate.

Private sector representatives then maintained that the rial must be gradually devalued at a controlled pace to reach its true rate of between 60,000 and 70,000 against the greenback. That would help Iran's weak trade balance similar to how China profited from the same practice by manipulating its currency, they said.

But pundits on the other side of the spectrum said an increase in foreign exchange rates does not necessarily entail a strengthened trade balance.

It may even lead to an excessive increase in imports with the aim of profiting off higher local prices and potential rent-seeking.

But when Trump unilaterally withdrew from Iran's nuclear deal, the rial went into a tailspin. Since then, the government tried to fix the rate of the rial in April, something that was vehemently opposed by the private sector.

In the months that ensued, the government has adopted a more open approach, but its one-sided policies are still heavily criticized by the private sector.

Unlike China, Iran's national currency devaluation came at a lightning speed.

A recent survey conducted by the Tehran Chamber of Commerce, Industries, Mines and Agriculture found that fewer than one-third of private sector participants expected the rial to lose so much value and continue falling.

Nevertheless, Iran's exported goods and local exporting companies have benefited from a fast-falling rial.

Petrochemical firms, many of whom are quasi-state companies that have benefited off currency fluctuations in recent months, top Iran's list of major exporters. They seem to carry enough steam to be able to continue the current trend.

Currency fluctuations of recent months have increased local prices considerably, which increase finished costs of production and negatively impact the competitiveness of exported goods.

If the government manages to control Iran's currency devaluation while cooperating with the private sector, it can capitalize on an opportunity to boost the country's trade balance. The administration will have to ensure that currency devaluation will be in line with the trajectory of other macroeconomic indicators and not impact consumer behavior negatively.

Iran's major manufacturing industries have fallen on hard times recently, as their level of production has decreased. Private sector participants in the latest gathering of the Government-Private Sector Dialogue Council identified the administration and its policies as the main cause, in addition to currency fluctuations.

"The government-unified rate [of 42,000 rials against the USD] is unreal. Much as the Tehran Chamber has called for true rate unification countless times, the request has not been realized," TCCIM chief Masoud Khansari said during the event, adding that there are now five exchange rates in the market.

Khansari noted that while local prices have jumped, leading to harsher conditions for ordinary Iranians, exporters have received a boost. He said that if the government manages to stabilize the national currency, "Iranian exporters can push out their competitors at least in the regional markets".