The devaluation appeared in the morning posting of the official exchange rates by the Central Bank of Iran. But the bank did not issue any press release or give any explanation for the dramatic change.
The Central Bank is known to have spent hundreds of millions of dollars—perhaps billions of dollars—defending the rial in recent years and trying to hold down the price of the dollar. So the change should save the regime a lot of money.
However, the devaluation left the rial far out of line with the rates charged by open market currency dealers in Tehran, at least on the day of the devaluation.
The US dollar went from an official rate of 10,599 rials on Tuesday to 11,717 rials on Wednesday, meaning Iranians had to pay 10.5 percent more for each dollar. But the free market was charging 12,250 on Wednesday, suggesting that a devaluation of 15.6 percent would have been warranted.
However, five days later, on Monday of this week, the two prices had converged. The bank’s posting was 11,725 rials per dollar while the open market rate was 11,740.
Jahangir Amuzegar, a Washington-based economic consultant who was minister of commerce and of finance in the 1960s and served on the Executive Board of the International Monetary Fund for many years, said Wednesday’s devaluation was “long overdue.”
Amuzegar said, “While the official cost-of-living index in the last six years has increased by more than 80 percent, the average rial/dollar value has gone up by less than 11 percent.”
Amuzegar cited four reasons that may have been behind the decision to devalue. “Now, while the government’s motive in its latest decision is not revealed, analysts point to four possible goals,” he said: “One, moving toward a more realistic rate; two, gaining extra rial revenue to cover part of the current year’s budget deficit; three, saving the Central Bank’s dwindling foreign exchange reserves; and, four, coping with the unintended consequences of two unrelated public policies—namely (a) a decision by the Council on Money and Credit to lower the interest rate on bank deposits, thus pushing liquid funds toward gold and foreign currencies, and (b) raising the competitive power of domestic energy-intensive industries hurt by recent energy price hikes as part of subsidy reforms.”
Amuzegar also warned that the Central Bank’s action doesn’t automatically mean that the fall in the value of the rial is over. “In view of the fact that the free market rate of the US dollar continued to rise the day after the official devaluation, it is not certain that the foreign exchange turmoil is over,” he said.
Amuzegar noted that there is much debate within the Islamic Republic over whether it would be best to have the rial priced much higher or much lower. “The public debate regarding the true value of the dollar has gone on uninterrupted—with President Ahmadi-nejad and a coterie of major importers recommending the dollar value be fixed at 5,000 to 7,000 rials. This up-valuation has been defended on the ground that (a) it lowers the costs of imported raw materials as well as semi-processed and capital goods, helping domestic producers; and (b) contains domestic inflation.
“Devaluing the rial to as much as 24,000 to 30,000 per US dollar has, in turn, been advocated by others as (a) a spur to exports; (b) increasing international competitiveness for domestic producers; (c) improving the trade balance; and (d) eliminating the ‘economic rent’ involved in the difference between the official and free market exchange rates.”
Ebrahim Razaghi, an economist in Tehran, emphasized the impact on domestic production. “Iran has been inundated with imported goods because of lower costs,” he told the state news agency.
It wasn’t known if Supreme Leader Ali Khamenehi had any role in the devaluation decision, but he publicly has given vocal support to domestic manufacturers who have complained about competition from cheap imports.
Politically, the devaluation can be seen as a rebuff to ultra revolutionaries who view the dollar price of the rial not in economic terms but ideologically. They see a decline in the value of the rial as reflecting poorly on the revolutionary regime’s management of the economy and undermining the prestige of the revolution.
The Central Bank posts daily rates for 25 currencies each morning. The lowest devaluation was 9.8 percent against the Australian dollar and the highest devaluation was 11.3 percent against the South African rand.
The euro went from 15,467 rials on Tuesday to 17,180 rials on Wednesday, a devaluation totaling 11.1 percent.