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Iran's Central Bank Says Oil Money Must Be Saved In 'Economic War' With U.S.

Abdolnasser Hemmati the head of Iran's Central Bank speaking at a conference in Tehran on September 1, 2018.

The head of Iran's Central Bank has reiterated that the country's foreign currency reserves will not be used to support the exchange rate of the national currency.

Abdolnasser Hemmati, the new chief of the Central Bank declared that the bank's foreign reserves are its "honor" and should not be used during "an economic war" with the United States.

The Iranian currency, which started to decline in 2017, has taken a beating in the last few months, as the U.S. announced its withdrawal from the nuclear deal and reimposed stringent sanctions on Iran's economy.

While a year ago, the dollar was traded close to 40,000 rials, now the exchange rate is above 10,000 on the free market.

Speaking at a conference in Tehran on September 1, Hemmati argued that "we should not live like rich kids" and use the oil income to support the exchange rate. Rather, the central banker expressed hope that non-oil export revenues should support the national currency.

Iran has around $40 billion in annual non-oil exports according to official figures, but it is not clear if all the hard currency earnings are repatriated or stay partly outside the country.

President Hassan Rouhani recently told parliament that he has ordered the Central Bank not to use the oil revenues to support the rial.

However, the declining currency has led to higher inflation, with most necessities substantially becoming more expensive for the people, who have been frustrated by the dire economic conditions; including high unemployment and a soaring cost of living.

The popular dissatisfaction has led to rounds of nationwide mass protests this year, which have turned into calls for regime change.

With this kind of tension in society it is not clear how long can the government afford to save its oil income and not intervene in the markets.

In his remarks, Hemmati also pinned the blame for Iran's currency woes on the "imbalance" in the banking sector and oversuplly of money in the economy.

But economists and experts believe that the structural problems of Iran's economic system and mismanagement are largely to blame for the country's reliance on oil income, as opposed to productivity and competitiveness in an age of open trade on the world markets.

As successive governments have printed money, Iran's money supply has surpassed its GDP, which is a recipe for inflation and serious problems in the banking sector.

In this sense, international sanctions imposed earlier this decade to force Iran to give up its ambitious and clandestine nuclear program, were just one factor in the country's economic downturn. The same can be said about the new U.S. sanctions. They just make an inherent problem worse.