The free market simply isn’t functioning. Very few currency exchanges are offering dollars for sale. Three websites that track the sales price of the dollar have all ceased posting any prices at all.
Prices of 30,000 rials to 40,000 rials per dollar are being bruited about. But without a real market, there is no way to ascertain value.
There is a black market, but it appears limited as the police swiftly arrest anyone found on the streets with a fistful of dollars. It isn’t known how many black market dealers are now being held. On Sunday, First Vice President Mohammad-Reza Rahimi said a man by the name of Jamshid Besmellah had been arrested for trying to “manipulate” the currency market.
The collapse of the rial at the start of October was due to many factors.
In a recent article, Patrick Clawson of the Washington Institute for Near East Policy (WINEP) explained one major element of the collapse.
He said the shift from subsidies to direct payments of welfare benefits included two elements. First, citizens were to get a welfare check each month. Second, 20 percent of the savings from reduced subsidies was to go to industry so it could invest in production machinery that would use less energy.
But, Ahmadi-nejad, didn’t make the payments to industry because he needed all the money available to make the welfare payments to the public.
Clawson explained:
“Iranian producers were now in a bind: The low energy prices that had been their competitive edge disappeared overnight. The government’s response was a looser monetary policy, including providing easy credit to firms in no position to pay. According to Iran’s Central Bank, the bank credit to the private sector went from 2.3 quadrillion rials in March 2010 (then worth about $250 billion) to 4 quadrillion in August 2012.
“Not entirely by coincidence, bank deposits (by far the biggest component of the money supply) rose over the same period from 2.1 quadrillion rials to 3.8 quadrillion. That was an 80 percent increase in bank deposits — while over a similar period, the IMF says, real GDP rose 7 percent.
“It does not take a genius to figure out what happens when 80 percent more money is chasing 7 percent more goods: price soar. The government reports that consumer prices rose 43 percent from March 2010 to April 2012; it has not published data for recent months, presumably because they show a further rise. If one accepts the official inflation figures, this means costs in Iran would have gotten ridiculously out of line with costs in competitor countries had the rial not lost value.
“The rial’s collapse means that Iranian firms may finally have a fighting chance against their foreign competitors. The wise policy would be to encourage the rial to fall even further, while tightening up on monetary policy to tamp down inflation.
“Of course, that would mean imposing pain on consumers, which goes against every instinct of the populists who run Iran’s economic policy. Therefore, such a sound policy is unlikely. Indeed, there are no signs that the loose monetary policy is going to change. Even the ever-optimistic IMF expects Iran’s inflation to remain above 20 percent next year.
“The irony is that the falling rial benefits the government more than anyone else. Most of Iran’s exports are in the government’s hands. With each dollar of exported oil now worth more rials, the government’s rial revenue rises, offsetting at least in part the lower volume of exports. That extra revenue would put the authorities in a good position to help businesses invest in more energy-efficient technology and to create more jobs.
“But that is not likely to happen. The government is much more likely to insist on selling dollars at an artificially low rate, on the theory that this keeps prices down. The real effect, however, is to generate high profits for the politically well connected, who get access to foreign exchange at the preferential rates,” Clawson wrote.