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Dollar in doldrums



Iranians have been dealing with an ever-increasing devaluation of the rial since the beginning of the present Iranian calendar (March 21, 2017) but the major and unexpected depreciation occurred almost a month ago, in mid-February, when is supposed to be the biggest crackdown on foreign exchanges in six years.

At the time, U.S. dollar broke all records and jumped to almost 50,000 rials in Tehran’s currency exchange shops, while it used to be bought almost 37,500 rials earlier in past April, 38,000 rials in past September, 41,000 rials in past December and 43,000 rials in early January, 2018.

What has contributed to recent events? 
Some critics discuss that since taking office in August 2013, Rouhani administration has tried to artificially keep the foreign exchange market at a level of stability in a bid to cover the inflationary impacts of rial devaluation, adding that the currency disturbances are due to a lack of clear monetary policy and mismanagement. The recent rial depreciation, as they further discuss, can be the result of government’s decision to benefit from the difference between the official and free market rates as a temporary solution to compensate for the wide budget deficit.

Some, in addition, blame Central Bank of Iran (CBI) for the volatility, since the state-run body has a full control over the free currency market and interferes with balance supply and demand as well as the prices by pumping dollar whenever it decides. The issue, in their view, is also justifiable via CBI’s short of funds to inject the needed hard currency to the market.

Besides, the recent decrease in banking interest rates made by CBI and the dominant stagnation in housing sector can also account for the forex market predicament. The two factors have increased Iranians’ demand for purchasing Bahar Azadi gold coins and hard currency as new investment options, for they believe via changing their cash money into dollar or gold, they can prevent devaluation of their assets.

Moreover, the impact of Iran’s current political tensions should not be neglected, they say. Trump is tightening its grip on Iran again, threatening it to re-impose sanctions lifted in 2015 and withdrawing from JCPOA (the Joint Comprehensive Plan of Action). There has been some news of a coordinated move by the U.S. and its Persian Gulf allies to up pressure on Iran by restricting its access to hard currencies. Iranians often obtain dollars via the United Arab Emirates, but implementation of new value added tax law in this country since the beginning of 2018 has practically locked the gateway of trade transactions between Iranian businessmen and their Emirati counterparts, which used to let the flow of dollar into Iranian market.

Major measures taken

To tackle one of the unprecedented slides in the value of the rial, which, if not curbed, would have a negative effect on attracting foreign investment and would end in inflationary consequences, the government took some major steps.

On February 14, Iranian police force and CBI initiated a joint operation to control the foreign exchange market when they detained almost 100 currency middlemen and frozen bank accounts reportedly worth 200 trillion rials ($5.3bn). The act could immediately pull down the dollar rate by 1,000 rials.

In late February, CBI issued permission for banks to issue rial bonds with an annual 20 percent interest rate and preselling of Bahar Azadi coin in the hope for absorbing some of the market liquidity. Furthermore, the central bank introduced hard currency bonds with a four percent to 4.5 percent return. In its other attempt to bolster rial, on February 28, CBI, who has always sought to switch to non-dollar based trade, clamped down on dollar trading and introduced new restrictions on it by blocking imports priced in the currency. Purchase orders by merchants which are based on U.S. currency are no longer allowed to go through import procedures in Iran’s customs offices since then. The decision, according to Iranian officials, is not expected to create major trouble for traders because the share of the greenback in Iran’s trade activities, as they say, is not high. The state-run body, moreover, has prepared a set of 19-sections policies as a blueprint to regulate the unsettlements of domestic monetary and foreign exchange markets, which is to be applied in near future.

Followingly, when currency prices cooled down a bit, CBI, which has always been seeking unification of the present dual forex regime in the market, issued permit for a limited number of currency exchange shops to sell foreign currency at official rate, less that the free market rate about 7,000 rials to 10,000 rials. The introduced exchange bureaus are allowed to sell up to $5,000 to customers who present their ID cards or passports and travel tickets.

Addressing the 57th annual general assembly of the Central Bank of Iran (CBI) on March 4, the central bank’s Governor Valiolah Seif announced that implementation of the described policies since mid-February has successfully curbed the fluctuations of Iran’s foreign exchange market and has restored confidence back.

Blaming the forex market fluctuations on currency traders, speculations in the market and the U.S. which was trying to destabilize Iran’s economy, Seif vowed that CBI will be able to manage the market not only by the current yearend but also by the end of the next Iranian calendar year (ending March 20, 2019).

However, some do not agree with him.

Controversy aroused

Referring back to the applied expanding policies and reduction of banking interest rates in September 2017, CBI critics explain that via doing proper analysis of domestic monetary system and foreign exchange market, the government could have managed to control foreign currency rate, but mismanagement has left the harvest ruined.

As they underline, the inappropriate policies of CBI, mainly injecting dollar to the market at official rates, has pulled out dollar from the economic wheel of Iran to Iranians’ piggy banks and in the pockets of the dealers. They explain that the issued rial bonds or the preselling of Bahar Azadi Coin are temporary remedies, effect of which will be removed in the short-run. Consequently, the future of forex market will not be brighter than its present.

Addressing the prohibition of dollar-based purchase order, which seems to be a win for the Euro, some express worry that the extra layer of currency swapping involved may add to the cost of imports into Iran and push the prices higher in the country.

Offering dollar and other currencies at official rates in some specific currency exchange shops is another tranquilizer which has caused major problems. Long queues are formed at the door of official foreign exchange bureaus and people are asked to stay in them since the sunrise. Some quarrels happen in the queues, which make the police interfere. A lot of non-official currency exchange shops are semi-closed; they do not sell dollar at all but buy if there is any.  An amalgamation of customers has been created; some are fake ones i.e. the middlemen who sell the purchased dollar at the official rate in the free market for making benefit, some customers are those who do not need foreign currency but just prefer to save them at home, and some are the Iranian travelers to foreign countries who face difficulties with finding hard currency. Foreign currency prices still experience fluctuations and even an increasing trend. Dealers and middlemen are still active although worried about the interference of the policemen. More importantly, the foreign currency price increase has already had its impact on inflation and the situation will predictably get aggravated.

Speaking on a televised program on Tuesday night, Seif admitted that dollar price should be matched with the reality of Iran’s economy. He criticized the opinion which accuses the government of controlling liquidity in an effort to reduce inflation, saying that despite the increase in liquidity, inflation is controlled and even decreased.

The central bank governor also discussed that the CBI act to reduce interest rates was an effort to convert short-term accounts into the long-term ones and to control inflation.

He underlined that the government’s monetary policies are not longstanding but flexible ones which can be changed in different conditions.

In fact, what is happening at the market does not entirely match with what is expected by the government to occur. Foreign currency rates are experiencing unsteadiness and the future seems murky but officials believe they have a good handle on the market.

Some economists suggest the CBI permit the rial to be devalued so that the economy can find a new balance, although the decision will be at the worth of another round of rampant inflation.

First published in our partner Tehran Times

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A Sustainable Recovery In Gaza Is Not Foreseen Without Trade

MD Staff



Gaza has seen conditions steadily deteriorate over the last two decades, leading to collapsing of the economy and basic social services. While additional cash inflows are urgently needed to bring relief to the difficult living conditions, a lasting recovery depends on a concerted strategy to revive the Gaza economy through access to external markets and expansion of commercial activities.

A new World Bank report explores the nature of the rapid decline of the socio-economic conditions in Gaza and identifies what is needed to unlock sustainable growth. The report will be presented to the Ad Hoc Liaison committee (AHLC) on March 20, 2018 in Brussels, a policy-level meeting for development assistance to the Palestinian people.

While additional aid is needed to provide humanitarian relief in the short term and ease the fiscal stress, it cannot continue to substitute for long term measures,” said Marina Wes, World Bank Country Director for West Bank and Gaza. “Serious commitments by all parties are needed to spur growth and jobs by putting in place the right conditions for a dynamic private sector. Without addressing the constraints, Gaza will continue to suffer with a heavy toll on its population,” she added.

Donor aid is urgently needed in the short-term to address the recent liquidity squeeze and improve dire humanitarian conditions.

Recent economic data revealed a drop in Gaza growth from 8 percent in 2016 to a mere 0.5 percent in 2017 with almost half of the labor force unemployed. The drop is attributed to a decline in inflows that has weakened reconstruction activity and led to a sharp decline in the income of a quarter of Gazans.

Access and quality of basic services such as electricity, water and sewerage is rapidly deteriorating and posing grave health risks. An additional destabilizing factor is the possible cuts to UNRWA funding – one of the main providers of jobs and services in Gaza. In fact, the cuts could risk income loss to 18,000 staff, and even more when counting their dependents.

Additional aid will be needed to avoid financial exacerbations. The potential reconciliation with Gaza, a positive for the territories overall, could increase the expected financing gap for 2018 from USD440 million to USD1 billion. Measures proposed by the Palestinian Authority will not be enough to close the gap and it will resort to domestic sources of financing including debt from local banks and arrears to the private sector and the pension fund. This could eventually choke the economies of both the West Bank and Gaza with negative consequences on suppliers, banks and ultimately growth and tax generation.

In the long term, aid will not be able to provide the impetus for growth, nor can it reverse Gaza’s de-development. The current market in Gaza is not able to offer jobs and incomes leaving a large population in despair, particularly the youth. Gaza’s exports are a fraction of their pre-blockade level and the manufacturing sector has shrunk by as much as 60 percent over the last twenty years. The economy cannot survive without being connected to the outside world.

Any effort at economic recovery and development must address the impacts of the current closure regime. Minor changes to the restrictive system currently in place will not be sufficient. Proposed projects to increase the supply of water and electricity are extremely welcome, but unless there is an opportunity to boost incomes through expanding trade, the sustainability of these investments will be in doubt.

The report highlights necessary preconditions for a sustained economic recovery in Gaza. They include a private sector that can compete in regional and global markets and increase its exports of goods and services. Required actions include relaxing the dual use restrictions, streamlining trade procedures at Gaza’s commercial crossing and rebuilding trade links with the West Bank and Israel.  Effective governance systems and institutional strengthening under the Palestinian Authority’s leadership are also key for a sustainable recovery.

Donors can also help by offering innovative financing instruments that can mitigate risks holding back transformative investments by the private sector in Gaza.

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Brazil Must Strengthen Structural Reforms to Drive Growth and Productivity

MD Staff



A sustainable economic recovery in Brazil can only be achieved through a programme of structural reforms aimed at driving growth and productivity. This is the finding of a report, Brazil Competitiveness and Inclusive Growth Lab, published by the World Economic Forum, which summarizes recommendations from a multistakeholder group comprising key actors and experts from the public and private sectors and academia. The report identified the main priorities for achieving higher growth and a more inclusive economy in Brazil with a view to informing the country’s economic strategy. The process was facilitated by the World Economic Forum in collaboration with the Ministry of Industry.

While Brazil’s economy is on a path to recovery, the Brazil Competitiveness and Inclusive Growth Lab report finds that over-reliance on its large domestic market and commodities exports has led to it falling behind other large emerging markets in productivity growth. Data from the Forum’s Global Competitiveness Report 2017-2018 suggests that important reasons for this are the high costs of doing business, the challenges for effective innovation and the relatively poor integration into global value chains of Brazil’s economy, which imports and exports considerably less than regional peers Mexico and Colombia and all the other BRICS economies.

According to the report, Brazil needs to put in place a new generation of reforms and public policies capable of addressing the high production costs, weak competence within industries, higher prices to consumers and low overall competitiveness, as all these factors lead to loss of potential wealth the country needs to raise living standards.

“The Competitiveness and Inclusive Growth Lab initiative in Brazil provides a successful example of using a multistakeholder approach to elaborate concrete and meaningful policy solutions to complex challenges. We hope the present experience will guide and promote future collaboration between the public and private sectors in Brazil,” said Børge Brende, President, Member of the Managing Board, World Economic Forum.

“Improving the business environment, deepening the integration of our economy with the rest of the world and creating a robust innovation ecosystem are the main building blocks of a more productive and competitive Brazil. This report presents a consensus roadmap to untap the potential of Brazilian economy,” said Marcos Jorge de Lima, Minister of Industry, Foreign Trade and Services of Brazil.

The recommendations of the multistakeholder group include:

Integration to global value chains: Recommendations in the report focus on improving market access, implementing trade and investment facilitation policies and improving the tax environment for trade, including a comprehensive analysis and review of Mercosur’s common external tariff (CET).

Innovation: Brazil still lags behind other leading economies in innovation. Better integration of policies and coordination between currently fragmented innovation centres would help to address this.

Public sector efficiency: In the Global Competitiveness Index, Brazil’s public sector underperforms the Latin America average, which in turn lags far behind the OECD average. Recommendations to improve efficiency centre on systematic integration of monitoring and evaluation mechanisms, allowing greater facility to reallocate investments in more productive sectors. This would also generate greater accountability and trust.

Reforming the business environment: A heavy regulatory burden, infrastructure deficit and tax system have all taken a toll on Brazil’s productivity. Delivering institutional and judicial reforms to reinvigorate domestic and foreign competition are needed to address this. To this end, the report examines a number of promising initiatives already being implemented by the Brazilian government.

The Forum’s Competitiveness and Inclusive Growth Lab Brazil is an ongoing multistakeholder initiative to support the design, launch and implementation of an actionable agenda to increase competitiveness. Like previous country experiences in Colombia and Mexico, its aim is to facilitate this by helping to build multistakeholder coalitions that comprise leaders from government, business and civil society.

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Consumer Economics Are Driving Retail Industry Bifurcation

MD Staff



With retail sales increasing 3.5 percent in 2017, compared to a gross domestic product growth rate of 2.3 percent the same year, the retail sector is showing signs of healthy growth thus the so-called ‘retail apocalypse’ is a myth, according to a new study from Deloitte. The study, “The great retail bifurcation: Why the retail “apocalypse” is really a renaissance,” found that the retail sector is healthy and shows strong signs of growth. Rather than a battle of online against brick-and mortar, Deloitte found that retail is changing in line with consumer income bifurcation, with both high-end and price-conscious retailers seeing revenues soar, growing 81 percent and 37 percent, respectively, while those in the middle realized a mere 2 percent increase in sales over the past five years.

“Despite the popular narrative, the ‘retail apocalypse’ is far from reality,” said Kasey Lobaugh, principal, Deloitte Consulting LLP and the report’s lead author. “Brick-and-mortar retail is not on or near its deathbed. In fact, we’re seeing retailers open new stores at an astounding pace, and physical retail is growing alongside digital. Rather than witnessing the demise of retail, our study shows a dramatic change in line with the impact of consumer bifurcation along economic lines. While specific retailers may see an apocalypse, others see opportunity.”

Based on a survey of more than 2,000 consumers and an analysis of a large collection of US-based publicly traded retailers, the study examines a growing disparity between consumer income cohorts and highlights the impact of this economic bifurcation on retailers.

Consumer income bifurcation defies traditional economic metrics
While strong economic indicators paint a promising portrait on the surface, the study looked deeper and found massive gaps in consumers’ discretionary spending power. Incremental income generated since the recession has disproportionately gone to high-income households, with virtually all income growth between 2007 and 2015 going to the top 20 percent.

Deloitte found that the household economic health correlates to consumer spending behavior. Key economic findings from the study include:

  • Economic well-being: Just one-in-five surveyed consumers (20 percent) are better off in 2017 than they were in 2007 in terms of disposable income, with little to spend on discretionary retail categories. Overall, four in five consumers (80 percent) have fewer funds for traditional retail segments such as apparel. Alongside this trend, high-income consumers are 10 percent more likely to report spending more over the last year.
  • Rising costs: Faced with stagnant levels of income, lower-earning consumers have seen the costs of nondiscretionary items skyrocket: health care expenditures have risen 62 percent, education 41 percent, food 17 percent and housing 12 percent, according to Deloitte’s analysis of reports from Bureau of Labor Statistics.
  • New expenses: Modern consumer essentials like mobile phones and data plans now take up an increased portion of discretionary spending, stealing share from traditional retail categories. Low-income consumers feel the brunt of the impact, spending 3.6 percent of their income on digital devices and data, compared to just 0.71 percent for high earners.

“Households have diverged along economic lines and now people’s respective income levels are steering their behaviors and dictating the success of retail segments,” said Robert Stephens, senior manager, Deloitte Consulting LLP and co-author of the study. “More affluent shoppers have fueled high-end retail as their income and net worth have grown, while lower-earning consumers, faced with growing expenses and dramatically less disposable income, have turned toward price-conscious stores. Retailers that try to court all consumers will likely be challenged as income bifurcation leaves different shoppers with differing motivations.”

Retail isn’t dying, and premier and low-price are thriving
In line with consumer bifurcation by income level, Deloitte found the retail market is also bifurcating along economically-driven divides. Through an analysis of publicly traded retailers, Deloitte defined three retail cohorts: premier retailers that deliver value via premier product and experience offerings; price-based retailers that deliver value by selling at the lowest possible prices and clearly communicating that proposition to customers and balanced retailers that deliver value via a balance of price and/or promotion.

Examined side by side, these three groups offer differing narratives that align with income-driven changes in consumer behavior:

  • More stores are opening than closing: From 2015 to 2017, price-based retailers gained 2.5 stores for every store balanced retailers closed.
  • Revenues have grown: Premier retailers have seen 40x more revenue growth than that of balanced retailers over the last five years, with revenues soaring 81 percent versus a mere 2 percent increase for balanced retailers. Price-based retailers, meanwhile, have seen their revenues steadily increase 37 percent over the same period.
  • Sales climb overall: Premium (8 percent) and price-based (7 percent) retailers’ sales rose in the past year, while sales of balanced retailers declined by 2 percent.

Income bifurcation Impacts consumers’ category, channel and spend decisions
Income bifurcation has triggered differences in consumer shopping behavior between economic groups. Beyond their actual spending levels, these two groups also differ in how and where they make purchases:

  • Preferred formats: Low-income consumers are 44 percent more likely to shop at discount retailers than other groups. These consumers are also more likely than others to shop at supermarkets, convenience stores and department stores.
  • Channel choices: The majority (58 percent) of low-income consumers are choosing to shop in store, while 52 percent of high-income consumers prefer to shop online. High-income consumers were also 42 percent more likely to report an increased propensity to shop online over the prior three months.
  • Shopping around: In-store spending fragmentation – or the number of retailers a consumer regularly shops – is 17 percent higher amongst high-income consumers. Fragmentation is even more exaggerated online, as affluent consumers are 40 percent more fragmented for online retailers than consumers in the lowest income cohort.

The millennial money myth
While millennials are often lumped together and portrayed as the source of disruption, Deloitte found that for the most part, millennial behavior (by income group) is virtually indistinguishable from other generations. Low-income millennials track closely with all other generations when it comes to whether they have spent in stores recently (79 percent and 81 percent, respectively), and in the middle-income cohort, there’s no difference between millennials and other generations, with 81 percent of each group having made purchases in-store.

However, high-income millennials, who make up less than one-fifth (19 percent) of the total millennial generation and just 6 percent of the population overall, skew perceptions of Gen Y as a whole. High-income millennials are 24 percent less likely than all non-millennial shoppers to shop in a store, and may be the source of the idea that millennials are the end of brick-and-mortar retail. When averaged together, the high-income shopper’s behaviors skew the averages for the entire millennial group.

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