The Iranian economy has been operating with a multitiered exchange
rate system for the past three decades. Currently, there are two
official exchange rates: the official interbank (forex chamber) rate,
which is used by banks for official hard currency transactions, and the
so-called free market rate, which is used by licensed foreign exchange
bureaus for all other transactions using the hawala system.
Traditionally, the free market rate has been a valid indicator of the
mood in the Iranian economy. The last major collapse of the rial value
came about in the second half of 2012 when harsh sanctions prevented the
Central Bank of Iran (CBI) from repatriating needed hard currency to
manage the artificially kept rate of 11,000 rials to the US dollar. At
that time, the free market rate collapsed to 30,000 rials to the
greenback and caused a massive backlash leading to
major economic decline in 2013.
However, ever since the election of President Hassan Rouhani in June
2013, the free market rate had experienced a relatively stable period,
gradually moving from 30,000 rials against the US dollar in the summer
of 2013 to about 35,000 rials in the summer of 2016.
Notwithstanding, in the past few months, the Iranian rial has been
experiencing a roller-coaster ride, and as of Jan. 4 the rial has lost
about 13% of its value against the US dollar since Sept. 15, 2016. The
decline of the free market rial/US dollar rate since the US presidential
election amounts to about 7%. The rate (currently at 39,500 rials to
the US dollar) had actually reached 41,000 toward the end of December
2016, but bounced back when the CBI assured currency traders that it
would. In fact, the governor of CBI, Valiollah Seif, has opined that the
real value of the rial would be around
36,000 rials to the greenback. Respected experts such as Ali Dini Torkamani
underline the fact
that the CBI is in a monopoly position to determine the exchange rate;
however, it is important to dissect some of the technical and
psychological reasons that have led to the recent fluctuations.
One reason for the loss of value to the US dollar is the general
appreciation of the greenback against other currencies. Incidentally,
the Iranian rial is priced against a basket of currencies that does not
include the US dollar. In fact, the rial is more influenced by the
fluctuations of European currencies (especially the euro), which also
lost value against the US dollar in the past few months. To prove the
point, in the period between Sept. 15, 2016, and Jan. 4 of this year,
the free market value of the Iranian rial only lost 5% against the euro.
Other proof for the impact of the strengthening of the US currency is
the fact that the official interbank rate of the rial lost about 3.3% of
its value against the US dollar between Sept. 15, 2016, and Jan. 4. In
the same period, the interbank rial exchange rate actually appreciated
against the euro.
There are also obviously psychological aspects that need to be taken into account. The
election of Donald Trump
in the United States and the anticipation of renewed anti-Iran policies
and sanctions, the extension of the Iran Sanctions Act by the US
Congress, uncertainties about the international oil price and domestic
political developments have all contributed to a fragile domestic
currency market and an atmosphere in which many economic players resort
to buying hard currency as a hedging mechanism.
The fact that the planned rate unification has been delayed by more
than a year (it was originally envisaged for March 2016) is an
indication of the complexities of the Iranian economy. Expectations were
that the implementation of the nuclear deal and the eventual lifting of
sanctions would actually strengthen the Iranian rial, but the rial has
lost value in both markets....
MORE