Why is the dollar surging in Iran?

In Iran, the value of the national currency is not only seen as a function of Central Bank policy, trade balance and inflation. In the absence of reliable consumer and business confidence indices, it has been perceived as a key indicator of the general state of the economy, and more broadly, the country’s international standing. Indeed, it is virtually impossible to engage in any private discussion in Tehran about the national currency without a mention of how the greenback once traded for 70 rial. This has been particularly the case in the past few years, when successive devaluations have been triggered by Western sanctions.

In 2002, Iran introduced a single exchange rate after years of maintaining a multi-tiered currency market, which among other adverse effects facilitated immense revenues for those able to take advantage of the arbitrage. Over the following decade, the Iranian currency maintained relative stability and kept being overvalued, thanks to Central Bank intervention. This system collapsed in 2012, when hard-hitting financial, economic and oil sanctions were imposed by the European Union and the United States. As a result, the multi-tiered exchange market re-emerged. Between 2012 and 2013, the divergence between the official and open market rates reached as high as 300%. This collapse in confidence triggered a rush for foreign exchange, precious metals and property, aided by low rial bank deposit rates amid high inflation.

In his 2013 campaign, incumbent President Hassan Rouhani thus made the economy a top priority, arguing that “it is important for the centrifuges to spin, but people's lives should run too.” Indeed, under Rouhani, Iran has exited a deep recession, while the inflation rate — which reached almost 40% when he was elected — has been drastically cut. With the signing of the July 14, 2015, Joint Comprehensive Plan of Action (JCPOA), many ordinary Iranians anticipated an immediate economic boost, fueled by the administration’s poor expectation management. However, as most of Iran’s centrifuges have stopped spinning under the JCPOA, so has the growth of its economy.

The monetary and fiscal measures that have been taken to stop galloping inflation are paradoxically what have greatly slowed down the economy, recently forcing Rouhani to do a U-turn and adopt a stimulus package. Yet, as some analysts have argued, “the expanded money supply and other efforts aimed at encouraging the private sector to borrow for projects are likely too little to stimulate the economy — but large enough to ignite inflation expectations.” Indeed, one indication of popular expectations of Rouhani and his promises about the economy and the impact of the JCPOA is how consumers and businesses alike have been delaying major purchases on the back of anticipations of a cheaper greenback as Western financial, economic and oil sanctions are set to be lifted. Again, paradoxically, these expectations of an improved economy are in effect helping cause the exact opposite. Amid this Catch 22 for the Rouhani administration and the Central Bank, the dollar has in past months jumped against the rial, undermining confidence among consumers. The key questions here are thus: Why has the dollar rate been surging in past months, contrary to popular expectations of the exact opposite? What can Rouhani and the Central Bank do about this matter? More importantly, do they, and should they, even want to do something to address the dollar surge?

On the day before Rouhani’s election on June 14, 2013, the dollar traded for 36,450 rial on the open market. Today, even following the surge in the dollar rate over the past months, the dollar is trading for almost exactly the same — 36,500 rials on the open market — while the official rate has nudged just over 30,000 for the first time. Mindful of annual inflation of 34.7% in the Iranian solar calendar year 1392 (March 2013-March 2014) and 15.5% the following year, it is evident that the Central Bank has more than maintained stability in the foreign exchange market. Moreover, the popular impression of a significant weakening of the rial in the aftermath of the JCPOA only makes sense if the dollar rate is seen in isolation. A cursory review of the performance of the rial against other major currencies over the past two years makes it evident that the perhaps primary reason for the recent surge in the dollar rate has little to do with the Rouhani administration or the Central Bank. Indeed, a review of the dollar and euro rates against the rial since before Rouhani’s election makes it clear that, while the dollar has remained constant in value, the euro is over 10% cheaper.

Read more: http://www.al-monitor.com/pulse/originals/2015/12/dollar-rate-surges-iran-rial-market.html#ixzz3tUIvhtlV