Iran's currency: Why did the rial tumble so precipitously? (+video)
US sanctions played a role. However, Iranians aren't blaming the US, they're blaming their own government.
The value of Iranâ€™s national currency, the rial, plunged to its lowest against theÂ dollarÂ in more than two decades this week, plummeting by an estimated 40 percent in the past four days.Â And while the precipitous drop has been brought on by US sanctions,Â Iranians are in large part blaming the government'sÂ massive economic mismanagement. Â
TheÂ rial has declined roughly 80 percent in the past year, and the street rate is now around 37,000 rials to the dollar. But economists and oil officials in Tehran say they were less surprised by the breadth of the currencyâ€™s depreciation than by the rapid speed at which it fell. Indeed, manyÂ have predictedÂ the rialâ€™s continued, albeit gradual, decline for more than a year.
The greatest shockÂ has been on the Iranian street, where people,Â panicked by the sudden drop in the national currencyâ€™s value,Â have been scrambling to trade their rials for safe currencies such as the dollar and euro.
â€śBefore, the currency situation was dysfunctional, but bearable: The rial was getting worse, but gradually. Now, itâ€™s just falling,â€ť says a Tehran-based businessman who runs a factory outside the capital. Â
Though what exactly triggered the sudden currency decline is still unclear, some speculate that the Central Bankâ€™s launch lastÂ week of a formal currency â€śexchange centerâ€ť may have inadvertantly fed the frenzy for dollars. Intended to control fluctuations in the exchange rate, the center allows importers of basic necessities, such as meat, rice, or oil to purchase foreign currency at a â€śpreferentialâ€ť rate that is actually only slightly below the street rate.Â Â
â€śThe center made it seem like the government is giving up trying to manage the rate, and is allowing the exchange rate to stay at these numbers,â€ťÂ says a veteran Tehran-based analyst,Â speaking by telephone on condition of anonymity. â€śIt gave the message to the business community that the government does not have the currency to keep up with the market. Now there is panic.â€ť Â
The role of USÂ sanctionsÂ
Economic pressure resulting from US Treasury sanctions is widely recognized as a significant force behind the rialâ€™s massive decline. But the blame for Tehranâ€™s deteriorating economy is being resoundinglyÂ placed on the Iranian government itself for failing to cushion the countryÂ against the impact of sanctions many viewed as inevitable.Â Much of the criticism is based on the fact that the government seems to have done little to prepare for a situation it must have seen coming. Â Â Â
Washington sanctions foreign firms that purchase Iranian oil and penalizes banks engaging in financial transactions with the Islamic Republic.Â It first implemented financial sanctions on Iran in 2006, and four rounds of sanctions by the United Nations Security Council followed.Â
Tehranâ€™s banking system became increasinglyÂ squeezed after 2007, as Washington boosted efforts to get US allies and other foreign governments and private entitites to implement unilateral financial sanctions imposed by the US Treasury.
â€śThis government has been the richest in the history of the Islamic Republic, and while it should have reserved billions of dollars for a future day like today, it did not,â€ť says the Tehran-based analyst.Â
Between 2005 and 2011, Tehran earned an estimated $465 billion from oil exports alone, according to data from the Organization of Petroleum Exporting Countries. Critics of Iranian President Mahmoud Ahmadinejad say his administrationâ€™s extravagant spending during this period â€“ on infrastructure and housing projects, subsidized loans, and cash handouts to lower-income and working-class Iranians â€“ boosted inflation and diminished Iranâ€™s currency reserves.Â
For the past two years, as US allies in western Europe and Asia deepened their implementation of US Treasury sanctions against the Islamic Republic â€“ essentially isolating Iran from much of the global financial system â€“ the Central Bankâ€™s access to foreign exchange reserves held in accounts overseas has become severely constrained.
This has left Iran vulnerable to currency speculation because itÂ doesnâ€™t have a thriving private sector, and unlike other oil producers in the Persian Gulf, hasnâ€™t built up its foreign assets or laid aside enough oil earningsÂ to be able to support its currency, says Hossein Askari, an economist at George Washington University.Â
At the same time, Iran has endured a sharp decline in oil sales, which started to fall in late 2010 due to the rise in transaction costs for purchases of Iranian oil resulting from sanctions.Â A European embargo against purchases of Iranian oil, imposed in July 2012, has pushed Iranâ€™s oil sales down even further.Â Today, primary purchasers of Iranian oil are refineries from Turkey, Japan, South Korea, China, Taiwan and India.
The countryâ€™s oil exports, which fluctuate between 900,000 to 1.1 million barrels a day, are 55 percent lower than what they were at this time last year.Â
â€śThe country has mismanaged countering the sanctionsâ€¦and today, we are faced with a situation where oil sales are down, the country has less foreign currency, and the government canâ€™t even transfer [most of] the money for oil it does sell back into the country,â€ť the Tehran-based analyst says.Â
Liquidity is now estimated by local economists to be seven times higher than what it was when Mr. Ahmadinejad first ascended to Iranâ€™s presidency, in 2005.Â Though the official inflation rate stands at roughly 24 percent, economists such as Askari of George Washington University say that given the extent of currency depreciation, inflation in Iran is actually double that figure.Â
Protesting the governmentÂ
Yesterday protests broke out in Tehranâ€™s Grand Bazaar, one of the countryâ€™s most important financial hubs, after dozens of people started chanting slogans around the area housing gold merchants, asking store owners to close their stores.Â
While some shops in that section of the Bazaar closed down as a show of sympathy with demonstrators, many closed for fear of looters, according to a family of gold merchants.Â
Protests also broke out yesterday on the blocks surrounding the area, and demonstrators were aggressively pushed back by riot police with tear gas, witnesses said. Iranâ€™s semi-official Fars News Agency, citing Iranâ€™s judiciary, said security forces arrested 16 â€śillegalâ€ť street money traders and speculators.Â
Many shops stayed closed today, the first day of the Iranian weekend, when Bazaar merchants typically open for half the day.
â€śPeople were just fed up with the dollar inflation â€¦ and were asking for support from the Bazaaris,â€ť says a business owner in the Grand Bazaar. â€śRight now, the government doesnâ€™t care. Hopefully, now that the people are out protesting, they might be pushed to sit up and actually do something.â€ť
Analysts in Iran say that, for the time being, there are stringent limits to what the government can actually do to try and stem the tide of depreciation.Â Â
â€śTheyâ€™re running out of dollars and simply do not have enough foreign currency to service the market,â€ť says a Tehran-based analyst.