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    Posted November 2, 2010 by
    Tehran, Iran

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    The Iranian Government Shoots Itself In The Foot With Its Monetary Policy


    (The following is a translation of a BBC Persian interview with Dr. Mehrdad Emadi, economic advisor to the European Union. A link to the Farsi-language original can be found below.)


    While China tries to keep the value of Yuan low, Iran's Ahmadinejad has ordered Rial's value to be increased


    Host: Mr. Emadi, how real is this move by Ahmadinejad to boost the value of Rial?


    Mehrdad Emadi: If we look at major economic factors, we see that the ability to produce inside the country for exporting purposes and the demand for the Rial inside the country and the deficit between Iran's imports versus our exports, they all indicate that we have more imports into Iran. And the reason for this is that Rial's value has been kept up artificially in relation to Dollar. This means that produced goods in Iran have gone up in price and  the value of imports has decreased.


    Host: We know that the value of currencies around the world are set by international markets. But in an isolated country like Iran what sets the rate of currency? How do currency merchants determine what the value should be?


    Mehrdad Emadi: They get their messages from the Bazaar. From a few days prior, the rate of demand for foreign and domestic currencies inside the country determines this rate. Those outside the country who are trying to import goods from Iran need to pay in Rials to Iran's producers. And based on that they determine that if the demand for Rial is low, the value of Rial must be lowered. This will make people to convert their Rials to foreign currencies, increasing demand for them. This affects the rate of the Rial versus the Euro, the Derham and the Dollar.


    Host: We know that the major revenue for Iran's government comes from oil sales and in return Iran gets either Euros or Dollars. Is it better for the Iranian government to keep the price of the Rial high?


    Mehrdad Emadi: Exactly! The major revenue for the Iranian government is the selling of Euros and Dollars inside the country. If Iran's government gets less Rials for the amount of Euros it sells, the revenue for the government will go down dramatically. We have to remember that the Iranian government has a budget deficit, increasing year by year. This is a very strange decision. Instead of increasing the sources of Rial revenues, the head of government announces that they are going to reduce them. In the first phase this will bring all government projects under question.


    Host: How practical is it for the government to base the currency on its real value in a short period of time?


    Mehrdad Emadi: Please allow me to change the word "real" to "what the government intends" for the value of Rial.

    The real value of currency is determined by the Bazaar. It's your ability to compete with other countries. The government can indeed do that. But if the government allows people to freely trade currency in an open market, my guess is that in less than a month this artificial value will break down mainly because people will rush to buy cheap currencies to cover their savings.


    Host: Are there any estimates as to what the value of the Rial (Toman) is against the Dollar?


    Mehrdad Emadi: If we look at three standard indexes around the world used for determining currency values, first we must look at the workforce efficiencies, comparing an hour's work time for Iran's industrial workers versus Korean or Turkish labor. Secondly the demand for our currency in international markets which translates to how much demand there is for our exports, and thirdly the foundation of the purchasing power inside versus outside the country. If we put it all together, and also considering that a healthy currency is one that in the long term brings imports and exports to an equilibrium, then the real value is something like 1800 Rials per Dollar. This will help our exporters, reducing imports.


    Host: Let's talk about imports and exports. In any way we look at it, Iran's exports are not even comparable to it's imports. For consumers inside the country isn't it better that the imports are cheaper?


    Mehrdad Emadi: That' correct. All our consumers will be very happy because imports are cheaper. For a period of time if the government supports this currency rate, the inflation will be reduced. But this will reduce our industrial and agricultural output, increasing unemployment in unprecedented ways. This is the exact reason the Germans fought for 25 years to keep the value of Mark down. This is the also the reason Japan faced off directly with the U.S. for 18 years to keep the value of Yen down.


    Host: Isn't that what China is doing?


    Mehrdad Emadi: This is what they are doing with Yuan and we are doing the exact opposite! We are shooting ourselves in the foot and delivering the knock-out punch to our own industries to keep the value of Rial up! This is indeed a very strange decision!



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