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Currency crisis impoverishes Iranians, strains economic defenses

DUBAI (Reuters) – Desperate to afford her daughter’s overseas university fees, 58-year-old retired Iranian teacher Maryam Hosseini withdrew all her savings from the bank to buy U.S. dollars.

It was not enough. With three years of study still to do, her daughter is heading back home, her future now on hold.

Hosseini’s tale of growing poverty is an increasingly familiar one among Iranians, who have long bought U.S. dollars to support their children financially or squirrel away savings.

“My daughter has to bury her dream of studying abroad and she has to come back. I cannot afford it anymore,” Hosseini said.

The cause of Hosseini’s misery was a sharp drop in the Iranian rial to its weakest against the U.S. dollar. The currency’s fall has not only made life more expensive, it may also test Iran’s ability to prop up an economy battered by crippling U.S. sanctions and the new coronavirus.

The dollar was being offered for 215,000 rials on Monday, according to website Bonbast.com, against an official rate of 42,000.

The currency plunge in recent weeks had forced the central bank to act, pumping hundreds of millions of dollars into the market to stabilise the rial. Central Bank Governor Abdolnasser Hemmatti described the interventions as “wise and targeted”.

The bank had ample foreign reserves, he said, without disclosing their amount.

But current account and fiscal deficits brought on by the economic crisis may require tapping those reserves, weakening Iran’s ability to curb rampant inflation, economists have said.

“They have limited foreign exchange reserves to inject in the market and will not be able to contain further depreciation in the presence of U.S. sanctions and isolation from the international community,” said Garbis Iradian, chief economist for MENA at the Institute of International Finance.

ERODING RESERVES

The rial has lost about 70% of its value following the U.S. withdrawal from Iran’s 2015 nuclear pact with six powers in 2018 and reimposition of sanctions.

The government has sought to compensate by creating several foreign exchange rates aimed in particular at easing the financial burden of importers.

But in the free market, the rial has continued its downward spiral, even after the latest central bank intervention.

Its recent fall is partly sentiment driven, coming after the U.N. nuclear watchdog urged Tehran to stop denying it access to two suspected former nuclear sites, and partly a result of a broader economic deterioration due to coronavirus. [nL8N2DW1QD]

But it might also signal a deeper shift.

“A more fundamental factor is the shift of the current account from a traditional surplus to a small deficit in 2020 due to the collapse in oil export revenues,” said Niels de Hoog, economist at Atradius, a trade credit insurance firm.

He said the central bank was estimated to still have enough reserves to support the rial, but they were eroding as they were helping finance the budget deficit.

Hit by U.S. sanctions, oil exports are estimated at 100,000 to 200,000 barrels per day (bpd), down from more than 2.5 million bpd shipped in April 2018.

The International Monetary Fund estimates Iran will draw down nearly $20 billion of reserves this year to $85.2 billion and another $16 billion next year.

‘POORER EVERY PASSING DAY’

The state budget deficit is estimated to hit $10 billion by March 2021, Tehran Chamber of Commerce, Industries, Mines and Agriculture head Masoud Khansari was quoted as saying by media. He said growth in the budget deficit and money supply would bring higher inflation, a weaker rial and less purchasing power.

The government has asked Iranians not to flee the rial to buy foreign currency, and most traders in central Tehran exchange offices have been refusing to sell dollars, said trader Soroush in Tehran, who declined to give his full name.

“When the U.S. dollar started to gain value against the rial, people rushed to the exchange offices to buy dollars but now it is calm,” he said.

But few now escape hardship. From the business elite to ordinary workers, most feel the impact of the sinking currency.

With rising taxes, falling subsidies, foreign markets limited by sanctions, and difficulty obtaining hard currency needed for trade, more and more businesses report problems.

“The currency crisis and trade sanctions have paralysed us. There is also a shortage of raw materials,” said a furniture factory owner in the northern city of Rasht.

Prices of basic goods like bread, meat and rice increase daily. Meat is too dear for many, costing $10 a kilo. The media regularly report layoffs and strikes by workers who haven’t been paid for months, including in government-owned factories.

“Life is very expensive. My salary is not enough to make ends meet. We are becoming poorer every passing day,” said government employee Reza Mahmoudzadeh.

With inflation estimated at 34.2% this year, according to the IMF, most Iranians are braced for more price hikes.

Iran’s clerical rulers want to prevent a revival of the unrest of Nov. 2019 that began over economic hardship but turned political, with protesters demanding top officials step down.

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Fed's offered flood of credit so far just a trickle in practice

(Reuters) – The Federal Reserve’s promise in the early days of the coronavirus pandemic to flood the U.S. economy with trillions of dollars seemed like the proverbial central bank bazooka.

It has been more of a trickle in practice, with activity outside the U.S. Treasury and other core financial markets so far only a fraction of what’s available, and with lending to companies in the “real” economy virtually nonexistent.

When Fed chair Jerome Powell appears before the House Financial Services Committee on Tuesday to discuss the central bank’s crisis response he will likely be pressed on that: More than three months into the worst economic meltdown since the Great Depression the Fed so far has made no loans under a vaunted “Main Street” program for small and medium sized companies, provided only $1.2 billion to local governments, and holds just $8.3 billion in corporate bonds.

It may, as Fed officials contend, be overall good news, and evidence their mere announcement of support for the economy has kept private lenders and borrowers transacting on their own, kept financial markets stable, and lifted confidence the Fed could keep the worst from happening.

Still, analysts including former Fed chair Ben Bernanke have questioned whether the Fed has been too strict in setting up its programs. While many worked as intended, the fact no Main Street loans have been issued “is a concern both politically and also in terms of getting liquidity to the firms that need it,” Bernanke said last week in a Brookings Institution webinar.

Bernanke said the Fed may need to make its laboriously designed Main Street program “more generous,” with lower costs for borrowers or subsidies for banks initiating the loans, if it wants to keep otherwise healthy small and medium businesses from ruin in the crisis.

“What we need is a compromise where we assist short term survival for small firms while not creating zombie firms,” that survive on cheap credit alone, Bernanke said. “It is not clear that the Main Street program … is going to be enough.”

LITTLE UPTAKE

So far none of the programs set up to backstop companies and markets outside the financial sector have seen much use. By contrast more traditional programs to ensure financial institutions keep doing business in a crisis have been more extensive and by most accounts successful.

Since late February the central bank has increased its overall balance sheet – a measure of its footprint in the economy – from $4.2 trillion to $7.1 trillion.

Most of that stemmed from keeping the government bond and mortgage-backed securities markets on track: holdings of U.S. Treasuries and MBS increased around $2.4 trillion. Foreign central banks swapping their currencies for dollars accounted for another roughly $230 billion.

What distinguished the response to this crisis from the 2007 to 2009 financial meltdown was the offer to lend directly to private firms and local governments. Announced with fanfare in early April, the Fed said it would, among other steps, provide around $2 trillion to buy bonds to finance large corporations; lend directly to small and medium sized businesses; and help state and local governments raise funds to meet expenses.

Weeks later those programs are up and running – the Fed on Monday launched its latest effort to purchase new corporate bond issues – but of the $1.85 trillion notionally available only about $9.5 billion has been tapped.

The Fed of course can’t make people apply for loans, and the credit costs and other measures that might trigger more aggressive purchases of corporate bonds, for example, have improved since the early days of the pandemic.

Powell in prepared remarks for Tuesday’s hearing said Main Street lending may prove valuable “in the months ahead” for firms hit by the dramatic drop in economic activity during the pandemic.

Still, analysts are cutting estimates of how large the Fed’s balance sheet might grow during a crisis some thought might test its capacities.

The CARES Act raised the possibility of $4.5 trillion in credit flowing from the central bank. The total may end up less than a fourth of that.

“The usage of the Fed credit facilities has been much slower and smaller than we had anticipated,” Oxford Economics analyst Kathy Bostjancic wrote last week, estimating perhaps only half of the Main Street loans available will be taken and perhaps less than a third of the corporate bond fund be used.

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