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Dollar in doldrums

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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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Afghan crisis: Changing geo-economics of the neighbourhood

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The Taliban takeover of Afghanistan has caused a rapid reshuffle in the geo-economics of South, Central and West Asia. While the impact on the Afghan economy has been profound, triggering inflation and cash shortage, it’s bearing on Afghanistan’s near neighbourhood has wider far-reaching consequences. The US spent almost $24 billion on the economic development of Afghanistan over the course of 20 years. This together with other international aid has helped the country to more than double its per capita GDP from $900 in 2002 to $2,100 in 2020. As a major regional player, India had invested around $3 billion in numerous developmental projects spanning across all the 34 provinces of Afghanistan. Indian presence was respected and valued by the ousted Afghan dispensation. With the US, India and many other countries deciding to close their embassies in Afghanistan and the US deciding to freeze Afghanistan’s foreign reserves amounting to $9.5 billion, the economy of the country has hit a grinding halt. IMF too has declared that Kabul won’t be able to access the $370 million funding which was agreed on earlier. The emerging circumstances are ripe for China and Pakistan to cut inroads into the war-torn country as the rest of the world watches mutely.

Beijing’s major gain would be the availability of Afghanistan as a regional connector in its ambitious Belt and Road Initiative (BRI) linking the economies of Central Asia, Iran and Pakistan. Afghanistan is already a member of the BRI with the first Memorandum of Understanding signed in 2016. Only limited projects were conducted in Afghanistan under the initiative till now due to security concerns, geographic conditions and the government’s affinity towards India. Chinese officials have repeatedly expressed interest in Afghanistan joining the CPEC (China Pakistan Economic Corridor), a signature undertaking of the BRI. CPEC is a $62 billion project which would link Gwadar port in Pakistan’s Baluchistan province to China’s western Xinjiang region. The plan includes power plants, an oil pipeline, roads and railways that improves trade and connectivity in the region.

China also eyes at an estimated $1 trillion mineral deposits in Afghanistan, which includes huge reserves of lithium, a key component for electric vehicles. This mineral wealth is largely untapped due lack of proper networks and unstable security conditions long-prevalent in the country. Chinese State Councillor and Foreign Minister Wang Yi hosted Taliban representatives in late June in Tianjin to discuss reconciliation and reconstruction process in Afghanistan. Taliban reciprocated by inviting China to “play a bigger role in future reconstruction and economic development” of the country. After the fall of Kabul, China has kept its embassy open and declared it was ready for friendly relations with the Taliban. It had also announced that it would send $31 million worth of food and health supplies to Afghanistan to tide over the ongoing humanitarian crisis. Pakistan, a close ally of China, has on its part has sent supplies such as cooking oil and medicines to the Afghan authorities. Pakistan having strong historical ties with the Taliban will possibly play a crucial role in furthering Chinese ambitions..

The immediate economic fallout of the crisis for Iran is its reduced access to hard currency from Afghanistan. After the imposition of US sanctions, Afghanistan had been an important source of dollars for Iran. Reports suggest that hard currency worth $5million was being transferred to Iran daily before the Taliban takeover. Now the US has put a freeze on nearly $9.5 billion in assets belonging to Afghan Central Bank and stopped shipment of cash to the country. The shortage of hard currency is likely to affect the exchange rates in Iran subsequently building up inflationary pressure. Over the years, Afghanistan had emerged as a major destination for Iran’s non-oil exports amounting to $2billion a year. A prolonged crisis would curb demand in Afghanistan including that of Iranian goods with a likely reduction in the trade volume between the two countries. In effect, Iran would find itself increasingly isolated from foreign governments and international financial flows.

India had been the wariest regional spectator watching its $3 billion investment in Afghanistan go up in smoke. Long-standing hostility with Pakistan has prevented land-based Indian trade with Afghanistan and the Central Asian Republic’s (CAR’s). Push by India and other stakeholders for setting a common agenda for alternate connectivity appears susceptible at the moment. India has been working with Iran to develop Chabahar port in the Arabian sea and transport goods shipped from India to Afghanistan and Central Asia through the proposed Chabahar-Zahedan-Mashhad railway line. India is also working with Russia on the International North-South Transport Corridor (INSTC), a 7,200 km long multi-mode network of ship, rail and road routes for freight movement, whereby Indian goods are received at Iranian ports of Bandar Abbas and Chabahar, moves northward via rail and road through Iran and Azerbaijan and meets the Trans-Siberian rail network that will allow access to the European markets. According to the latest reports, the Taliban declined to join talks with India, Iran and Uzbekistan on Chabahar port and North-South Transport Corridor, which has cast shadow on the Indian interests in the region. India’s trade with Afghanistan had steadily increased to reach the US $1.5 billion in 2019–2020. An unfriendly administration and demand constraints may slow down the trade between the two countries.

With the US withdrawal, the CARs would find their strategic and economic autonomy curtailed and more drawn into the regional power struggle between China and Russia. While China has many infrastructure projects in Central Asia to its credit, Russia is trying to woo Central Asian countries into the Russia-led Eurasian Economic Union (EEU), though so far it was able to rope in only Kazakhstan and Kyrgyzstan. CARs would need better connectivity through Afghanistan and Iran to diversify their trade relations with Indo-Pacific nations and to have better leverage to bargain with Russia and China. Uzbekistan, the most fervent of the CARs to demand increased connectivity with South Asia, expressed its interest in joining the Chabahar project in 2020, which was duly welcomed by India. The new developments in Afghanistan would force these countries to remodel their strategies to suit the changed geopolitical realities.

The fact that Iran is getting closer to China by signing a 25-Year Comprehensive Strategic Partnership cooperation agreement in 2020 adds yet another dimension to the whole picture. India’s hesitancy to recognize or engage with the Taliban makes it unpredictable what the future holds for India-Afghan relations.

The hasty US exit has caused rapid reorientation in the geopolitical and geo-economic status-quo of the region. Most countries were unprepared to handle the swiftness of the Taliban takeover and were scrambling for options to deal with the chaos. The lone exception was China which held talks with the Taliban as early as July, 28 weeks before the fall of Kabul, to discuss the reconstruction of the war-torn country. Chinese Foreign Minister Wang Yi also took a high-profile tour to Central Asia in mid-July which extensively discussed the emerging situation in Afghanistan with Central Asian leaders. Since the West has passed the buck, it’s up to the regional players to restore the economic stability in Afghanistan and ensure safe transit routes through the country. Any instability in Afghanistan is likely to have harrowing repercussions in the neighbourhood, as well.

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Turkish Economy as the Reset Button of Turkish Politics

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Democracy has a robust relationship with economic growth.  Barrington Moore can be seen as one of the leading scholars focusing on the relationship between political development and economic structure with his book titled “Social Origins of Dictatorship and Democracy” first published in 1966. According to Moore, there are three routes from agrarianism to the modern industrial world. In the capitalist democratic route, exemplified by England, France, and the United States, the peasantry was politically impotent or had been eradicated all together, and a strong bourgeoisie was present, and the aristocracy allied itself with the bourgeoisie or failed to oppose democratizing steps. In Moore’s book, you can find out why some countries have developed as democracies and others as dictatorships.

It can be argued that economic development facilitates democratization. Following this argument, this article is an attempt to address the Turkish case with the most recent discussions going on in the country. One of the most powerful instruments used by the political opposition today is the rhetoric of “economic crisis” that has also been supported by public opinion polls and data. For instance, the leader of İYİ Party Meral Akşener has organized lots of visits to different regions of Turkey and has been posting videos on her social media account showing the complaints mostly centering around unemployment and high inflation. According to Akşener, “Turkey’s economic woes – with inflation above 15%, high unemployment and a gaping current account deficit – left no alternative to high rates.”

Another political opposition leader, Ahmet Davutoğlu raised voice of criticism via his social media account, saying “As if monthly prices hikes on natural gas were not enough, they have introduced 15% increase on electricity costs. It is as if the government vowed to do what it can to take whatever the citizens have.”

A recent poll reveals that about 65 percent think the economic crisis and unemployment problem are Turkey’s most urgent problems. Literature on the relationship between democracy and economic well-being shows that a democratic regime becomes more fragile in countries where per capita income stagnates or declines. It is known that democracies are more powerful among the economically developed countries.

The International Center for Peace and Development summarizes the social origins of democracy in global scale as the following:

“Over the past two centuries, the rise of constitutional forms of government has been closely associated with peace, social stability and rapid socio-economic development. Democratic countries have been more successful in living peacefully with their neighbors, educating their citizens, liberating human energy and initiative for constructive purposes in society, economic growth and wealth generation.”

Turkey’s economic problems have been on the agenda for a long time. Unlike what has been claimed by the Minister of Interior Affairs Süleyman Soylu a few months ago, Turkish economy has not reached to the level which would make United States and Germany to become jealous of Turkey. Soylu had said, “You will see, as of July, our economy will take such a leap and growth in July that Germany, France, England, Italy and especially the USA, which meddles in everything, will crack and explode.”

To make a long story short, it can be said that the coronavirus pandemic has exerted a major pressure on the already fragile economy of Turkey and this leads to further frustration among the Turkish electorate. The next elections will not only determine who will shape the economic structure but will also show to what level Turkish citizens have become unhappy about the ongoing “democratic politics.” In other words, it can be said that, Turkish economy can be seen as the reset button of Turkish politics for the upcoming elections.

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Finding Fulcrum to Move the World Economics

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Domenico Fetti / Wikimedia Commons

Where hidden is the fulcrum to bring about new global-age thinking and escape current mysterious economic models that primarily support super elitism, super-richness, super tax-free heavens and super crypto nirvanas; global populace only drifts today as disconnected wanderers at the bottom carrying flags of ‘hate-media’ only creating tribal herds slowly pushed towards populism. Suppose, if we accept the current indices already labeled as success as the best of show of hands, the game is already lost where winners already left the table. Finding a new fulcrum to move the world economies on a better trajectory where human productivity measured for grassroots prosperity is a critically important but a deeply silent global challenge. Here are some bold suggestions

ONE- Global Measurement: World connectivity is invisible, grossly misunderstood, miscalculated and underestimated of its hidden powers; spreading silently like an invisible net, a “new math” becomes the possible fulcrum for the new business world economy; behold the ocean of emerging global talents from new economies, mobilizing new levels of productivity, performance and forcing global shifts of economic powers. Observe the future of borderless skills, boundary less commerce and trans-global public opinion, triangulation of such will simply crush old thinking.

Archimedes yelled, “…give me a lever long enough and a fulcrum on which to place it, and I shall move the world…”

After all, half of the world during the last decade, missed the entrepreneurial mindset, understoodonly as underdog players of the economy, the founders, job-creators and risk-taker entrepreneurs of small medium businesses of the world, pushed aside while kneeling to big business staged as institutionalized ritual. Although big businesses are always very big, nevertheless, small businesses and now globally accepted, as many times larger. Study deeply, why suddenly now the small medium business economy, during the last budgetary cycles across the world, has now become the lone solution to save dwindling economies. Big business as usual will take care of itself, but national economies already on brink left alone now need small business bases and hard-core raw entrepreneurialism as post-pandemic recovery agendas.

TWO – Ground Realities:  National leadership is now economic leadership, understanding, creating and managing, super-hyper-digital-platform-economies a new political art and mobilization of small midsize business a new science: The prerequisites to understand the “new math” is the study of “population-rich-nations and knowledge rich nations” on Google and figure out how and why can a national economy apply such new math. 

Today a USD $1000 investment in technology buys digital solutions, which were million dollars, a decade ago.Today,a $1000 investment buys on global-age upskilling on export expansion that were million dollars a decade ago.  Today, a $1000 investment on virtual-events buys what took a year and cost a million dollars a decade ago. Today, any micro-small-medium-enterprise capable of remote working models can save 80% of office and bureaucratic costs and suddenly operate like a mini-multi-national with little or no additional costs.

Apply this math to population rich nations and their current creation of some 500 million new entrepreneurial businesses across Asia will bring chills across the world to the thousands of government departments, chambers of commerce and trade associations as they compare their own progress. Now relate this to the economic positioning of ‘knowledge rich nations’ and explore how they not only crushed their own SME bases, destroyed the middle class but also their expensive business education system only produced armies of resumes promoting job-seekers but not the mighty job-creators. Study why entrepreneurialism is neither academic-born nor academic centric, it is after all most successful legendary founders that created earth shattering organizations were only dropouts.  Now shaking all these ingredients well in the economic test tube wait and let all this ferment to see what really happens.

Now picking up any nation, selecting any region and any high potential vertical market; searching any meaningful economic development agenda and status of special skills required to serve such challenges, paint new challenges. Interconnect the dots on skills, limits on national/global exposure and required expertise on vertical sectors, digitization and global-age market reach. Measuring the time and cost to bring them at par, measuring the opportunity loss over decades for any neglect. Combining all to squeeze out a positive transformative dialogue and assemble all vested parties under one umbrella.

Not to be confused with academic courses on fixing Paper-Mache economies and broken paper work trails, chambers primarily focused on conflict resolutions, compliance regulations, and trade groups on policy matters.  Mobilization of small medium business economy is a tactical battlefield of advancements of an enterprise, as meritocracy is the nightmarish challenges for over 100 plus nations where majority high potential sectors are at standstill on such affairs. Surprisingly, such advancements are mostly not new funding hungry but mobilization starved. Economic leadership teams of today, unless skilled on intertwining super-hyper-digital-platform-economic agendas with local midsize businesses and creating innovative excellence to stand up to global competitiveness becomes only a burden to growth.

The magnifying glass of mind will find the fulcrum: High potential vertical sectors and special regions are primarily wide-open lands full of resources and full of talented peoples; mobilization of such combinations offering extraordinary power play, now catapulted due to technologies. However, to enter such arenas calls for regimented exploring of the limits of digitization, as Digital-Divides are Mental Divides, only deeper understanding and skills on how to boost entrepreneurialism and attract hidden talents of local citizenry will add power. Of course, knowing in advance, what has already failed so many times before will only avoid using a rubber hose as a lever, again.  

The new world economic order: There is no such thing as big and small as it is only strong and weak, there is no such thing as rich and poor it is only smart and stupid. There is no such thing as past and future is only what is in front now and what is there to act but if and or when. How do you translate this in a post pandemic recovery mode? Observe how strong, smart moving now are advancing and leaving weak, stupid dreaming of if and when in the dust behind.

The conclusion: At the risk of never getting a Nobel Prize on Economics, here is this stark claim; any economy not driven solely based on measuring “real value creation” but primarily based on “real value manipulation” is nothing but a public fraud. This mathematically proven, possibly a new Fulcrum to move the world economy, in need of truth

The rest is easy  

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