Wednesday , 4 October 2023

Why Iran’s currency repatriation rules threaten rising exports

Al-Monitor – When the administration of President Hassan Rouhani fixed the exchange rate of the Iranian rial against the US dollar back in April — an ultimately failed effort to curb the free fall of Iran’s national currency — it also revived a controversial mandatory currency repatriation policy. The initiative, which obligates exporters to bring home their hard currency revenues through designated channels, may yet prove perilous.

Private sector businesses are less than happy with a regulatory stance that forcefully tells them where to redirect their hard-earned money. But, at the same time, it is difficult to argue that export yields — a major source of hard currency revenues under extraordinary conditions defined by reimposed US sanctions — should flow outside the country. So top private sector representatives, namely those of the Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA), have been vocal in their support for hard currency repatriation. They have also fiercely opposed — to no avail — what they perceive to be faulty mechanisms adopted by the Central Bank of Iran (CBI) that will end up hurting exports, and especially exports to Iran’s neighbors.

“It is the stance of the ICCIMA that export yields must be repatriated and be used to cover legitimate purposes, including imports,” ICCIMA Deputy President Pedram Soltani told Al-Monitor. “But where we diverge from the CBI concerns its belief that exporters’ yields should be dealt with using the artificially low rates maintained in NIMA.”

NIMA is the Persian acronym for the CBI’s monitored online exchange system launched days after the rial rate was fixed at 42,000 against the greenback in April. The move was conceived to foster transparency and manage import requirements in the face of an increasingly chaotic economic landscape. But it has since created problems of its own, given that it has failed to embrace the open market.

In the case of foreign currency repatriation, the issue chiefly relates to petrochemical companies that have been at the root of some of Iran’s currency challenges in recent months. As Soltani explained to Al-Monitor, the companies have reached an agreement with the government to offer their hard currency revenues at an agreed rate of about 80,000 rials to the dollar. That is noticeably lower than average NIMA rates, which have recently fluctuated between 90,000 to 118,000 rials, and a far cry from open market rates that have hovered in the 118,000 to 130,000 rial range for the past few weeks.

“This means there is no demand for higher rates in NIMA as importers and other buyers prefer to wait in long queues — sometimes taking up to three months — to receive their currencies at the subsidized rate,” the private sector representative said.

After months of unyielding private sector criticism, the central bank, trying to take a relatively more responsive approach under new Governor Abdolnaser Hemmati, signaled that it has heard and acknowledges the other side of the argument. In this vein, Hemmati and his deputies have held meetings with private sector representatives to carve out a new approach to foreign currency repatriation. This led to a directive relayed on Nov. 19 by the CBI, but it again disappointed the private sector as it showcased a tone-deaf approach.

The CBI’s revised currency repatriation policy did not consider any of the fundamental reforms requested by the private sector and only divided exporters into four categories based on total annual exports: those with annual exports of up to 1 million euros are henceforth exempt from having to offer their yields in NIMA. Exporters falling into the three remaining categories of total annual exports amounting to between 1 million and 3 million euros, between 3 million and 10 million euros, and higher than 10 million euros will have to offer 50%, 70% and 90% of their hard currency proceeds to NIMA, respectively. Remaining foreign currency revenues will have to be repatriated by way of being exchanged with imported raw materials and other expenses related to domestic production.

Private sector representatives have since continued to show their dissatisfaction with the revised policies. ICCIMA President Gholamhossein Shafei said on Nov. 24 that current hard currency repatriation rules will push professional exporters out of the picture. “CBI’s new directive not only does not facilitate exports but will cut them off and cost us export destination markets,” said president of the Iran-China Chamber of Commerce and long-time exporter Asadollah Asgaroladi on Nov. 26.

As Soltani sees it, this will perpetuate a “double standard” and tie legitimate exporters in potential legal battles and lengthy back-and-forth with the Iranian authorities. In his telling, this will only serve to hurt exports, prove counterintuitive (as it will reduce the country’s foreign currency revenues) and in turn damage production and job creation.

On the other hand, the discrepancy in the various exchange rates increasingly creates incentives for dodging taxes and circumventing laws. A practice commonly witnessed in recent months has seen exporters renting commercial IDs — issued by the different chambers of commerce but ultimately greenlighted by the Ministry of Industry, Mine and Trade as well as affiliated organizations — only to secretly offer their foreign currency yields at the higher open market rates.

In line with the apparent broader pattern of Iran’s currency crisis this year, the government has fallen into another trap in its endeavor to prevent misuse of commercial IDs. According to Soltani, the process to obtain a commercial ID — which in the past usually took around two weeks — now takes about six months. And even if the government somehow manages to completely eliminate the ways in which exporters misuse commercial IDs, it cannot cut off smuggling.

He told Al-Monitor, “Again, law-abiding exporters will be forced into an unhealthy competition with those turning to smuggling,” adding, “So, all in all, the mechanisms devised by the central bank are unsustainable.”

Problematic foreign currency repatriation mechanisms also threaten Iran’s exports to neighboring partners. Iran’s regional exports have seen a significant boost in recent months — up by 32% in the first half of the current Iranian year, which began March 21 — due to the cheaper rial. Chief among the export destinations is western neighbor Iraq, which has become closer with Iran after the reimposition of US sanctions.

In this vein, Soltani warned, “There is an increased chance of goods being traded illegally through kolbars [workers carrying goods across borders] and smuggling, further hurting legitimate exports,” arguing that while exports may ultimately remain roughly unchanged, they may shift toward illegitimate channels.

Maziar Motamedi is an Iranian financial journalist based in Tehran. He covers Iran’s banks, the foreign exchange market, insurance, financial tech and housing.