The Judiciary announced that 46 unofficial money changers—those who sell on street corners and have no licensed business office—had been arrested for the crime of changing money at a rate the government does not like.
Economy Minister Shams-eddin Hossaini said flatly last week that the government intends to crush the black market. “The unofficial currency market will be gathered in,” he phrased it.
But for all practical matters, the foreign exchange market is now confined to limbo, as few people are willing to sell dollars at all because the government is trying to dictate prices.
Just as in January, the government has decreed a rate of exchange it demands all money changers use—28,500 rials to the dollar. That is 20 percent below the last freely published open market rate of 35,800 last Tuesday, October 2.
The new rate is widely considered laughable. There is no sign of any number of exchange merchants actually putting dollars up for sale at that rate. Most exchanges in the Bazaar have reopened under police orders, but many have no dollar rates posted outside. Those that are posting rates, presumably under police orders, generally tell buyers they have no dollars available.
One Tehran businessman said, “Before the currency situation was dysfunctional, but bearable. The rial was getting worse, but gradually. Now it is in free fall.”
Essentially, the exchange market went into limbo last Wednesday and has not re-appeared. Various exchange rates are being bruited about, but in the absence of a serious open market and with the police chasing black market sellers though the streets, no one really knows what an honest exchange rate is.
With the real market no longer functioning, anyone can demand any figure he wishes. And he will likely quote a very high figure since a seller must now crank in the very high risk of trying to do business with the police in pursuit.
The Bazaar exchange houses shut down in protest last Wednesday but reopened Saturday under police coercion. Much of the rest of the Bazaar also shut down Wednesday and Thursday. Some merchants closed in sympathy with the exchange dealers, while others closed our of fear of rioters.
The police have also moved against websites that publish exchange rates. The Mesghal website posted the figure of 35,800 rials last Tuesday. On Wednesday and Thursday, there was just a blank spot next the US dollar on its website.
When markets reopened Saturday after the Sabbath, Mesghal posted the figure of 28,500 rials to the dollar, presumably at the orders of the government. That figure sat there unchanged from Saturday to Monday, although true free market figures routinely shift by the hour. Monday afternoon, Mesghal dumped the 28,500 figure and left a blank spot for the rest of Monday and on Tuesday.
Two other websites, Mazanex and DataLine, have posted no dollar figures at all since last Tuesday.
It appears the rial has died and gone to another world.
Last Wednesday, protesters angry over the rial’s collapse and surging inflation rioted in the center of Tehran. Videos showed thousands of people in the street in front of Bank Melli. Police fired tear gas. Trash bins were overturned and set afire, a standard feature of street disorders in Tehran.
One of the chants heard most often was: “Leave Syria alone. Think about us.”
Eyewitnesses said the disorders lasted three hours. They have not been repeated since then. Riot police were deployed on the streets in large numbers after last Wednesday’s disorders to discourage any repeat,
The protests appeared to be completely spontaneous. There were no indications the political opposition had used social media to try to gather the protesters. The government has also not accused the opposition of fomenting disorder. (In fact, it has just pretended that nothing at all happened.)
If the protest was indeed spontaneous, it must be giving the government nightmares. The prospect of a mass public uprising with no leadership is the ultimate fear of all authoritarian regimes. The disorders that have overthrown regimes in the Arab world all began spontaneously.
But the fact that a week has passed without further street protests will likely restore some of the regime’s confidence.
Still, the rial crisis and inflation remain. The attention is chiefly on the rial, but the larger threat to the regime likely stems from inflation. The rial price is of direct interest only to a minority. But the price of bread and rice and chicken is another matter; all Iranians are impacted daily.
Some economists say Iran is now facing raging inflation. The government is no longer posting the inflation rate and the details of its calculation each month. The last announced rate was 23.5 percent, but Majlis Speaker Ali Larijani has said it was really 29 percent. Economists generally believe it is much higher, perhaps above 70 percent, which would be the highest in the world at this time.
Steve Hanke, an economic professor at Johns Hopkins University in Baltimore, told Bloomberg news, “We’re getting into what is technically hyperinflation.” He estimated inflation is now running around 70 percent per month.
The public appears to be blaming the government for the rial’s collapse and the raging inflation rather than foreign sanctions.
Since the regime has been telling the public daily that sanctions are ineffective and have been defeated by the brilliance of the Iranian state, it is unable to turn on a dime and blame sanctions now. President Ahmadi-nejad did, however, blame “the enemy’s psychological warfare” last week. He said investigators have pinpointed 22 kingpins who caused disarray on the exchange market. That does not appear to have attracted much support and is seen by many as a lame excuse to try to drive the blame away from his own policies.
In the eyes of many economists, one of the main culprit’s in the rial’s collapse has been Ahmadi-nejad’s personal insistence that the Central Bank maintain interest rates lower than the inflation rate. As a result, no one has an interest in keeping their savings in the banks as their savings will simply lose value with each passing day. As a result, the public is driven to buying gold, foreign exchange and land in an effort to preserve wealth. Some people are reportedly stocking up on consumer goods on the assumption that a hundred jackets will maintain value better than millions of rials.
Economists also complain of the Ahmadi-nejad Admin-istration’s loose money policies. While Ahmadi-nejad accuses the United States of “printing money” and debasing the dollar, it is Ahmadi-nejad who has been printing money. In the five Persian years up to last Now Ruz, the volume of rials rose 169 percent—a surefire way to set off massive inflation.
Many merchants are said to be reluctant to sell goods. Instead, they are hoarding them on the argument that a dishwasher is worth more tomorrow than the rials for which it would be sold today. Some merchants are said to be offering to sell goods only for dollars.
The rial’s decline moved into high gear Monday, October 1, when the government announced its newest effort to limit the decline. It created a Foreign Exchange Center (FEC) where it said unlimited dollars would be put on sale at 2 percent less than the open market rate. It said only importers of medical items and a few basic foodstuffs would any longer be able to get dollars at the official rate of 12,260 rials per dollar. The implicit abandonment of the official rate seemed to set fire to the rial and expedite the flight into other currencies.
The Central Bank published the 2-percent-off rate on its website for only three days. It has now removed all reference to that discounted rate.
Most analysts seem to agree that the government has not put sufficient dollars up for sale on the FEC to satisfy demand. Governments trying to defend their currency routinely pile dollars on the market to keep the exchange rate down.
The failure of Iran’s Central Bank to do so has sparked suspicion that Iran is running out of dollars, although it had more than $106 billion in reserves last December, according to the International Monetary Fund (IMF). It seems unlikely the bank could have run through that huge stock in 10 months.
The Wall Street Journal said the Central Bank may be refusing to defend the rial because its analysts may have concluded state policies have already killed the rial. Under that logic, it would be throwing good money after bad and just wasting dollars to defend the rial. But that is also a prescription for hyper-inflation.
If that is what is happening, it amounts to the Central Bank itself voting no-confidence in the Ahmadi-nejad Administration.