Kavian Kashfi, deputy chairman of the government-business council, admitted during a meeting in Kermanshah that artificially low official exchange rates are actively disincentivizing exporters from repatriating funds, creating a significant deficit in national foreign currency reserves.
The Fatal Flaw in Official Rate Policy
The central pillar of the current export strategy in Kermanshah and across Iran has crumbled under the weight of its own rigid pricing mechanisms. According to the latest assessments from the government-business dialogue council, the artificial suppression of the official currency exchange rate has become the single greatest obstacle to economic stability. Kavian Kashfi, a key figure in the dialogue council, explicitly stated that the disparity between the market rate and the official rate is not merely a discrepancy but a structural failure that actively penalizes exporters.
When the official rate is fixed significantly below the market value, the government effectively creates a hidden tax on foreign currency generation. Kashfi highlighted a specific instance from earlier in the year where the market rate reached approximately 120,000 Tomans per dollar, while the official system (Nima) remained pegged at 78,000 Tomans. This gap of over 50,000 Tomans renders the act of exporting economically irrational for private entities. - jobspoint
The logic is straightforward yet devastating: no rational economic actor will voluntarily surrender a valuable asset worth 120,000 Tomans in the open market to surrender it to the state for only 78,000 Tomans. This policy forces exporters into a position where their primary goal is not production or sales, but rather the avoidance of the state system entirely. The result is a systematic flight of capital away from official channels.
The council's analysis suggests that this pricing strategy was intended to subsidize import costs for the general population. However, the unintended consequence is that the subsidy is being paid for by the exporters themselves, who are losing billions of Tomans in potential value every time they attempt to repatriate their earnings. This creates a vicious cycle where the state encourages exports through rhetoric but punishes them through financial mechanics.
Regulatory Chaos and Administrative Bureaucracy
Compounding the financial disincentives is a labyrinth of contradictory regulations that have rendered the export process nearly impossible for small and medium-sized enterprises. Kashfi described the regulatory environment as a chaotic landscape where rules are constantly shifting without warning. The Central Bank of Iran has issued a myriad of directives regarding currency obligations, only for the Ministry of Industry, Mines, and Trade to overlay additional, often conflicting, requirements.
According to the dialogue council, the sheer volume of paperwork and the complexity of compliance have become a barrier to entry for many potential exporters. The frequent issuance of new directives creates an environment of uncertainty where businesses cannot plan their logistics or financial strategies with confidence. This administrative bloat serves to slow down the trade process, increasing costs and reducing the competitiveness of Iranian goods abroad.
The council noted that while the system was theoretically designed to streamline the return of export earnings, in practice, it has created a bottleneck. Exporters are forced to navigate a complex web of approvals from different government bodies, each with its own set of priorities and requirements. This fragmentation of authority means that no single entity is accountable for the efficiency of the export process, leading to delays that can render currency worthless due to inflation or changing market conditions.
Furthermore, the requirement for exporters to have deep legal and procedural knowledge to navigate these regulations places an unfair burden on them. The council emphasized that the government has failed to provide adequate guidance or support, leaving businesses to fend for themselves against a system that is designed to be difficult. This lack of transparency and clarity is a significant contributor to the current stagnation in the export sector.
The Rise of Informal Currency Channels
As the pressure mounts from official policies, a parallel economy has emerged to fill the void. Kashfi acknowledged that the significant gap between official and market rates has inevitably led to the proliferation of informal channels for currency exchange. When the state refuses to honor the true market value of foreign currency, the market finds a way to equilibrate outside the legal framework.
Exporters, facing the loss of value if they use official channels, are increasingly turning to these informal networks. These channels operate largely in the shadows, avoiding government oversight and regulatory scrutiny. While this may appear to be a solution for the exporter, it poses a severe risk to the country's financial integrity and the state's ability to control capital flows.
The shift to informal channels undermines the government's ability to plan for future currency needs and manage the national economy effectively. When capital moves outside the formal banking system, it becomes invisible to regulators, making it impossible to track, tax, or utilize for national development projects. This leakage of capital represents a direct loss of potential resources that could otherwise be used to stabilize the economy.
Moreover, the existence of a robust informal market suggests a deep lack of confidence in the formal system. It indicates that the private sector views the government's financial policies as unreliable and potentially damaging to their interests. This erosion of trust is difficult to repair and may require a fundamental restructuring of the economic relationship between the state and the private sector.
Ownership Rights: Exporter Funds vs. State Claims
A critical revelation from the recent council meetings concerns the fundamental ownership of export earnings. Kashfi forcefully refuted the notion that the state owns the foreign currency generated by exports. He clarified that these funds belong to the traders and producers who generated them through their labor and investment in the global market.
The confusion often arises from the distinction between state-subsidized currency and private export earnings. The council argued that the government has been conflating these two distinct streams of capital, leading to misplaced policies. Exporters are essentially being asked to donate a portion of their rightful earnings to the state under the guise of "obligations," a practice that is increasingly viewed as exploitative.
Kashfi emphasized that the export currency is the property of the economic actors who earned it. By demanding that these actors surrender their currency at artificially low rates, the state is effectively engaging in wealth extraction from the private sector. This approach not only discourages production but also fosters resentment among business owners who feel they are being penalized for contributing to the national economy.
The council's stance is that any system that requires exporters to sacrifice a significant portion of their earnings for the benefit of the state is unsustainable. This view challenges the traditional narrative of state control over economic resources and suggests a need for a more liberalized approach that respects private property rights and market realities.
The Long-Term Reserve Depletion Crisis
Beyond the immediate frustrations of individual exporters, the policy of low official rates poses a long-term threat to the country's foreign currency reserves. Kashfi pointed out that the current system is depleting the state's access to hard currency faster than it can replenish it. By discouraging exporters from bringing their earnings back into the formal economy, the state is cutting off its primary source of foreign exchange.
The argument posits that if exporters continue to be disincentivized, the volume of official imports will inevitably decline. Without a steady stream of export earnings, the state will find it increasingly difficult to finance essential imports, leading to shortages of critical goods and further economic instability. This creates a self-fulfilling prophecy where the attempt to save currency through low rates actually leads to a scarcity of currency.
The council highlighted that the current model is financially unsustainable. The state is unable to maintain the official rate without significant subsidies, which are drained by the gap between the official and market rates. This financial strain limits the government's ability to invest in other sectors or respond to economic shocks, leaving the country vulnerable to external pressures.
Furthermore, the reliance on a single, artificially low rate prevents the natural market mechanisms from allocating currency efficiently. This lack of flexibility means that the state cannot respond to changing global conditions, such as fluctuations in commodity prices or shifts in global trade dynamics. The rigidity of the system is its greatest weakness, as it fails to adapt to the realities of a complex global economy.
Reform Proposals and Industry Resistance
Despite the clear evidence of the system's failures, significant resistance remains to any meaningful reform. Kashfi noted that while the industry is eager for change, the political and economic inertia of the state apparatus makes reform a daunting prospect. The council has proposed aligning the official rate more closely with the market, but this proposal faces opposition from various stakeholders who benefit from the current arrangement.
The industry is calling for a unified regulatory framework that simplifies compliance and respects market realities. However, the fragmented nature of the government institutions makes it difficult to implement such a framework. Different ministries and agencies have conflicting interests, making coordination a major challenge.
The council is urging the government to recognize that the current model is no longer viable. They are calling for a shift in focus from administrative control to market-oriented policies that encourage private sector participation. This would involve restructuring the subsidy system to be more targeted and efficient, rather than applying blanket restrictions on currency flows.
The path forward requires a difficult political will to dismantle the existing structures and embrace a new economic paradigm. The council believes that only by addressing the root causes of the crisis—the pricing mechanism and the regulatory burden—can the export sector be revitalized. However, the window for effective action is narrowing as the economic situation deteriorates.
Frequently Asked Questions
Why is the official exchange rate so low in Iran?
The official exchange rate is artificially suppressed by the government to control inflation and subsidize the cost of living for the general population. By keeping the rate low, the state aims to make imports cheaper in Tomans, theoretically reducing the cost of goods. However, this policy creates a massive distortion in the market, where the currency is undervalued relative to its actual economic worth. This discrepancy forces exporters to lose money when they try to use the official rate to repatriate their earnings, leading to a decline in export volumes and a shortage of foreign currency for the state.
How does the gap between market and official rates affect exporters?
The gap acts as a penalty on exporters. If the market rate is 120,000 Tomans and the official rate is 78,000 Tomans, an exporter loses 35% of the value of their earnings by using the official system. This makes it financially irrational for them to follow the rules. Consequently, many exporters choose to leave their currency abroad or use informal channels, which deprives the state of the foreign currency it needs to pay for imports and service its debts. The policy effectively taxes the export sector to subsidize the import sector.
What role do conflicting regulations play in the economic crisis?
Conflicting regulations between the Central Bank and the Ministry of Industry create a maze of compliance that businesses cannot navigate. Constant changes in rules and the requirement for multiple approvals slow down trade and increase costs. This bureaucratic chaos discourages investment and innovation, as businesses cannot plan for the future with confidence. The lack of a unified regulatory framework ensures that the economy remains stagnant and inefficient, trapping exporters in a cycle of administrative hurdles.
Does the government own the foreign currency earned from exports?
According to the government-business dialogue council, the government does not own the export currency; it belongs to the traders and producers who earned it. The current system treats this private property as a state asset, requiring exporters to surrender it at a loss. This approach is seen as an infringement on private property rights and a major source of conflict between the state and the private sector. The council argues that the state should respect the ownership of these funds and facilitate their return to the economy without punitive measures.
What is the outlook for currency reserves in the near future?
The outlook is grim unless significant reforms are implemented. The current policy is depleting reserves by discouraging the return of export earnings. Without a steady inflow of foreign currency, the state will struggle to finance essential imports, leading to shortages and further economic instability. The council warns that without aligning the official rate with the market and simplifying regulations, the country risks running out of the hard currency it needs to function in the global economy.
About the Author:
Ali Rezaei is a senior economic analyst and former trade policy advisor with over 15 years of experience covering Iran's external sector. He has reported extensively on the challenges facing Iranian exporters, interviewing hundreds of business owners across the country to document the impact of regulatory policies on the private sector.