Apr 10, 2018

A prominent Iranian member of parliament's recent statement about a significant outflow of capital from the country has raised eyebrows. Commenting on the foreign exchange fluctuations in March, parliamentary economic commission head Mohammadreza Pourebrahimi said some $30 billion of capital had fled Iran in the final months of the last Iranian year, which ended March 20. To assess such a phenomenon, it is necessary to grasp the parameters that lead to capital flight and their impact on the Iranian economy.

Within a theoretical framework, there are several key causes of capital flight in national economies: exchange rate misalignment; political and economic instability; general policy shortcomings in the protection of investments; financial and capital account deficits; corruption; and major foreign debt. With the exception of foreign debt, the current state of the Iranian economy offers all of the above, and these factors, especially political instability and corruption, can motivate economic players to move their capital abroad. However, one needs to be careful with classification of all flows in Iran as “capital flight.”

Though the mentioned $30 billion capital outflow cannot be deducted from official data, one can identify an overall pattern in the Central Bank of Iran’s data on net capital account deficit. According to Central Bank of Iran data, in 1395 (the year ending March 20, 2017) there was a net capital account deficit of $18.3 billion and in the first six months of 1396 a deficit of $6.3 billion. These are high figures considering that in previous years, the country had a positive net capital account balance. As such, it seems that capital flows have gone in the wrong direction after the implementation of the Joint Comprehensive Plan of Action in January 2016. But why?

The first fact to consider is the push toward transparency in how statistics are captured, processed and presented. It has been established that past and present statistics fail to reflect some of the facts about the shadier aspects of the Iranian economy. Indeed, according to Shargh Daily, during the presidency of Mahmoud Ahmadinejad (2005-2013), some $100 billion to $200 billion of “dirty money” fled the country. Some of these funds, such as the $3 billion embezzlement case in Bank Melli, became very public. All signs are that the flight of capital that has been accumulated through corrupt practices — that is, via smuggling, sanctions busting, administrative or financial corruption — is still prevalent in Iran, though the real volume of such capital flight is very difficult to gauge. In many cases, such funds flow in other forms, such as gold — a phenomenon that explains why Iran remains a large market for gold, despite the gradual normalization of banking relations. Another form of shifting capital outside the economy is in exports, where the financial proceeds never return to Iran. This has compelled the government to consider the reintroduction of “financial guarantees” to be signed by exporters.

Another aspect to understanding the mechanism and volume of capital flows is the movement of funds within the existing hawala system in Iran. This system is used by foreign exchange bureaus and relies on parallel flows of funds through a trustee system. In essence, when a transaction happens through the hawala system, initially no money flows across borders. This means that at some point in the process, funds have to actually flow across borders to correct the balance of payments. Consequently, some of the capital movements that seemingly look like capital flight are just corrections to balance the flow of payments.