Industry Spotlight: Bazaars
/By Dorna Maryam Movasseghi, Research Fellow
"The bazaar and the mosque are the two lungs of public life in Iran."
Mottahedeh’s judicious metaphor aptly captures the vital essence of one of Iran's oldest and most expansive life forces -- the bazaar. Much like the lungs, bazaars have been responsible for oxygenating more than just the social spheres of Iran; these microcosmic cities have also been fundamental in shaping the economic and political trajectories of the country for millennia.
A siege upon the senses, bazaars are a cornucopia of the most delectable sights, smells, textures, and sounds that trace back to 3000 B.C. in ancient Iranian towns and cities. Now, under a maze of arches and narrow corridors, bazaars and their merchants, bazaaris, continue to trade goods, currency, news, and gossip.
Throughout history, bazaaris enjoyed tremendous growth of their wealth, status, and power. They used this power to influence historical events, from the Constitutional Revolution to Prime Minister Mohammad Mosaddegh’s famous endeavor to nationalize Iran’s oil. This powerful status was only halted during the Pahlavi era when there was a shift of focus towards modernization and Westernization. This shift resulted in a period where the bazaars, although continuing to reap the benefits of economic growth, were cast aside as a lesser part of the economy. It was only after the Revolution when bazaaris were once again able to secure higher positions within the government. Consequently, bazaars returned to exert a dominating role in the economy after 1979.
Despite the tumultuous ebb and flow of Iran’s political and economic states of affairs, bazaars today continue to demonstrate their resilience and malleability. Despite having to navigate a virtually unprecedented pandemic, the bazaars are no strangers to extreme lows in the economy. From varying iterations of sanctions vying to suffocate their markets to internal political turmoil, the bazaars have had to adapt to survive. With reliance on travel and tourism having fallen between 2000 and 2019—ending at 6.6% of GDP in 2019—the bazaars must focus on Iran’s own citizens. Exactly how much the bazaars themselves contribute to the GDP overall is difficult to determine, but “Services,” a sector that encapsulates bazaars, composes 55% of the country’s GDP. As for the challenges of the pandemic - given their unique ability to merge indoors with the outdoors, bazaars were a success story in Iran's reopening efforts in the spring and summer of 2020 and given their sales of vital goods, suffered less than other outlets.
The biggest challenge for the bazaar industry has been ongoing sanctions by the West. There was a brief reprieve during the JCPOA era as the agreement aided in Iran’s 12.5 percent economic growth in the 2016-2017 fiscal year, yielding nearly 700,000 new jobs. However, after former President Trump withdrew from the nuclear deal and reimposed sanctions, Iran’s economy was quick to contract. The post-JCPOA era has had deleterious effects on the Iranian economy, with unemployment rates reaching 80% in some cities.
As today's sanctions have worked to contract Iran’s economy, debilitating the currency, bazaars have not been unscathed. A recent Congressional Research Service Report delineated the economic punishments awaiting foreign banks conducting “transactions with sanctioned Iranian entities.” According to the report, the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) seeks explicitly to target “Iran’s import-export community,“ including the bazaaris, by impinging on their ability to obtain trade financing for the purchasing or selling of goods.
Inflation caused in large part by sanctions is another blow to the industry. Today, with the purchasing power of the Iranian Rial at historic lows, bazaaris have sought to exploit certain loopholes presented by Iran’s trifecta of exchange rates: the official subsidized rate, the current market rate, and a rate controlled by the Central Bank of Iran, known as the NIMA rate. The NIMA rate, which allows Iranian exporters to sell their foreign currency earnings for Iranian rials, has slowly risen since its inception in April of 2018, inching closer to the open market rate. Thus, of the three rates, the official subsidized rate, or the government dollar, is the only stable, invariable rate. At 42,000 rials (4,200 toman) per $1, the government dollar values the rial drastically above the open market rate, which currently stands at nearly 280,000 rials.
The government dollar, established in April 2018 by Vice President Es’hagh Jahangiri, is used to import essential goods, typically including those exempt from US sanctions. This rate has been maintained to protect Iranian consumers, most notably by former President Hassan Rouhani, who rejected a proposal in February 2021 that sought to eliminate the official exchange rate. Concern surrounding the elimination of the rate is anchored in fear that extreme inflation would ensue without a proper gauge of other social and economic factors. Although the country’s economy has been facing an onslaught of inflationary impulses, the government dollar, created to keep down the cost of imported food, medicine, animal feed, and other essential items, is at risk of causing a spike in inflation if it is eliminated.
However, the paradox at the heart of the government dollar has been its contradicting impact– increasing inflation. Hamid Pourmohammadi, Iran’s United Nations Deputy for Economic Affairs, reported that removing the dollar would only increase inflation by 7 percent. However, because of corruption and the exploitation of the government dollar, Pourmohammadi predicted a 28 percent increase if the rate continues to be used. Bazaaris, who own large shares of entire bazaar markets, are granted the government dollar in order to purchase and import essential goods to then sell to their consumers. The rationale behind this process is that if companies, or bazaaris in this instance, can buy these goods without the pressure of inflation, they can sell them at a more reasonable rate while still earning a profit. From here, the problem becomes two-pronged: either the “goods” are not even being imported by those acquiring the subsidy, or the bazaaris can buy foreign currency, like the dollar, with the subsidized rate and then sell the dollar for the open market value; ultimately earning a seven times profit. Thus, the inflation rates for essential food and non-food items remain astronomically high, despite the government dollar being generously allocated to import goods.
This abuse of the government dollar, which has led some bazaaris to focus more on dollar and gold trading than on sales of commodities - has not gone unnoticed by government representatives. The failure of the government dollar to stabilize critical aspects of the economy, notably by providing people with reasonable prices that their tumbling currency could meet, has resulted in the Iranian Parliament’s recent decision to remove the subsidy gradually. A foundational part of this transition has been circumscribing the list of goods that qualify for the government dollar, limiting the inflationary shock that the economy would face after its removal. On January 9, 2022, Iran’s Parliament voted in favor of ultimately eradicating the government dollar while emphasizing that the conditions to do so “should be right.” Exactly when or what conditions could produce the Goldilocks environment needed to move forward with the removal is uncertain, but with the growing threat of hyperinflation, decisions may be made in the very near future.
The adaptability of bazaars and bazaaris can be witnessed throughout history, and their adjustment to the removal of the government dollar will likely be swift. However, it is worth noting that bazaar adaptability does not always translate into positive outcomes for customers, as evidenced by the result of the government dollar manipulation. Given the immense influence that Iran’s bazaars have over the economy and availability of goods for the population, it will be crucial to monitor and investigate the bazaars' transitions and decisions in the coming months as the new financial situation and outcomes of international nuclear negotiations and sanctions decisions, unfold.
