The rial jumped off the cliff Monday. The dollar cost 5,000 rials more Monday afternoon compared to Sunday afternoon, losing about 14 percent of its value in just a single day. It lost another 1,000 on Tuesday.
“It’s a disaster,” one importer told Agence France Presse. “Our business lady was really crying. She was losing millions of dollars.”
The loss over the last two months has been devastating, Based on the daily quotes published on the Mesghal website, the rial lost 42 percent of its value during August and September, plunging from 19,980 rials to the dollar on August 1 to 34,700 rials on October 1.
There were three main interpretations of the cause.
• The United States State Department issued a statement boasting that sanctions had caused the plunge.
• The Islamic Republic, however, could not accept that as the cause, even though it blames the United States for everything else that goes wrong in the world. But since it has proclaimed for years that sanctions are ineffective, it couldn’t blame the rial plunge on the Americans. Instead, it proclaimed Tuesday that “speculators” were behind the rial’s plunge. And it pledged to root them out. There was talk of sending the police into the market.
• The Iranian public, as far as could be determined, appeared to see the government as the cause, accusing it of mismanagement of the economy. Many in the Majlis, where critics of the Ahmadi-nejad Administration are legion, were quite happy to lay the blame at his feet.
Economists generally attributed the plunge to a combination of all three—sanctions, mismanagement and a speculative bubble.
Hassan Hakimian, with the School of Oriental and African Studies (SOAS) at the University of London, told Reuters: “There is very little, effectively, the Central Bank and the authorities can do to calm the situation because, even when they take extraordinary measures to calm the market,… the market interprets those additional measures as a sign of abnormality.”
For the average Iranian on the street, the economy is not reflected in the price of the dollar, however, but in the price of goods—inflation is what the average citizen relates to.
“Prices are rising every day and it just doesn’t stop,” said Khosrow, a retiree. He was forced to get work as a taxi driver because his diminishing pension is no longer enough to live on.
Maryam, a young shopper, said, “The price of my toothpaste, a foreign brand, has tripled in just a few months. Now, I’m buying an Iranian one, but it has also nearly double in price.”
The officially announced inflation rate has risen only slightly in recent months to 23 percent. But Majlis Speaker Ali Larijani last week said the real rate was 29 percent. Economists generally believed it is much higher than that.
The rial’s decline did not begin with Ahmadi-nejad or with sanctions. It began shortly after the revolution. The rial had been steady at around 70 to the dollar from the late 1950s until the 1979 revolution, at which time it began to fall precipitously. The story over the last third of a century has been one of constant decline, with sudden drastic plunges followed by long periods of slow but steady slippage.
A 1979 rial has now lost 99.8 percent of its value.
The latest disaster day for the rial was Monday. On Tuesday, the market was in total disarray. Reuters queried currency dealers and got figures all over the board, with one quoting the rial at 40,000 to the dollar. That appeared to be the exception, or even a false report.
The three main websites that query multiple dealers and average out the rates they are offering all showed the rial continuing to slide Tuesday after Black Monday, but at a slower rate. Mesghal quoted a closing price for the dollar Tuesday at 35,500 rials, while Mazanex and LiveData both published a closing figure of 35,800.
The accompanying chart on this page shows the daily figures since Now Ruz using the Mesghal published rates.
The table below shows the speed of the decline by listing the date on which the rial passed another thousand mark against the dollar in the last two months.
20000 Aug 2
21000 Aug 6
22000 Sep 6
23000 Sep 8
24000 Sep 9
25000 Sep 10
26000 Sep 26
27000 Sep 29
28000 “
29000 Sep 30
30000 Oct 1
31000 “
32000 “
33000 “
34000 “
35,000 Oct 2
The collapse effectively started last Tuesday, September 25, when the decline totaled 1,110 rials to the dollar. That date is significant. It was the day after the government opened its new Foreign Exchange Center (FEC) as its “solution” to the exchange problem.
Under this new arrangement, the government ceased selling dollars at the official rate of 12,260 rials for all but a handful of imports; essential foods like wheat and chicken plus medical items are all that can now be imported at that rate. (See last week’s Iran Times, Page One, for more details.)
Importers of most other goods were told they could buy dollars at the FEC for 2 percent less than the price on the open market. The 2 percent discount price was to be set each morning—presumably based on the previous day’s closing price—and would prevail throughout the day.
The plunge that began the next day indicated that the public saw the new FEC price as an admission that the official rate was phony and as government acceptance of the open market’s lack of faith in the rial. The FEC appears to have intensified the race to hard currency by effectively linking government economic policy to the open market exchange rate.
Cliff Kupchan, a Middle East analyst with Eurasia Group, a political risk research firm, told Reuters, “The government’s initiative … brought to the surface a tremendous lack of confidence in its [the government’s] ability to manage the currency. The attempt to fix it [with the FEC] triggered a worse crisis via market psychology.”
The rial’s collapse reflected a desire by the public to get out of the rial and into safer savings instruments. People aren’t just buying dollars. They have also been buying gold and jewelry and other goods. The property market has seen prices rise by about a third so far this Persian year.
But there are other concerns behind the collapse. There have been persistent reports that the government doesn’t have enough dollars to supply the demands of the market. The government denies that, as one would expect. But the belief is widespread that there just are not enough dollars out there to fund Iran’s need for dollars. And that feeds the plunge in the rial’s value.
The law of supply and demand says the rial will plunge if there aren’t enough dollars supplied to meet demand. But since state policy is anything but transparent, no one really knows what the supply is. The market runs on rumors, not accepted facts.
In a statement issued Sunday, the Central Bank insisted it had plenty of dollars—but pointedly without giving any figures for its reserves—and said $181 million had been sold at the FEC in its first week of operations. But Reuters said Iran imports around $2 billion worth of goods a week, so $181 million was a paltry sum.
Still, not all imports are in dollars. For example, South Korea buys oil from Iran and pays for it in its local currency, the won. Won payments are deposited in a bank in Seoul and Iranian importers buy Korean goods by drawing on that account. Dollars don’t enter into those transactions with Korea.
But the Islamic Republic has never detailed the extent of such transactions. Traders, however, periodically report that banks have refused to sell them the dollars they need. The public knows that US banking restrictions have cut Iran off from much of the global banking system and that some purchasers of Iranian goods have been unable to make payments to Iran.
For example, more than 40 percent of Iranian oil bought by India is paid for in rupees deposited in an Indian bank. But unlike the case of South Korea, Iran historically imports very little from India and doesn’t need all those rupees. Presumably, Iran is shopping around for Indian goods to use those rupees, but Iran’s government has not said what it is doing.
Inside the Islamic Republic, news coverage of the rial’s plunge was limited. There were no banner headlines: “Rial collapses.”
The state-owned Islamic Republic News Agency (IRNA) simply dismissed the quotes on the rial’s falling value. It quoted the spokesman for the money changers’ association, Nosrat Ezzati, as saying the published figures “are artificial as no real exchange is happening in the market.”
On Tuesday, when the headline should have been the rial, the English-language daily Iran, which is state-owned, carried not a word about the crisis. It’s economic page headlined, “Steel exports up 176%.”
The English language daily Tehran Times did report what happened to the rial Monday. But in a standard tactic used by Iranian journalists when handling news disliked by the government, it started its rial story on a positive note. Its lead story on Page One headlined: “Rial will rise as forex center gains steam: CBI governor.” It quoted the governor of the Central Bank of Iran (CBI), Mahmud Bahmani, as saying the rial would rise against the dollar as more transactions are made at Foreign Exchange Center. Then, later in the story, the Tehran Times reported truthfully on the collapse of the rial. But it devoted a mere two paragraphs of a 12-paragraph story to that news.
A check of nine Persian language dailies showed the Tehran Times approach was the norm. Most carried something on Page One, but only a few papers, like Sanat, an economic daily, made it the lead. Many just carried a brief. Most used the Tehran Times formula with the hardline Jomhuri Eslami saying speculators were trying to harm the rial and Gostaresh carrying interviews with bankers on the rial’s problems. Hamshahri, the daily with the largest circulation by far, led with a story on possibly making the Rey district of Tehran a separate city. It carried a one-paragraph brief on the rial.
Despite the perky approach of Bahmani, it remained unclear if the government had any faith in the Foreign Exchange Center. Although the government said it would sell dollars for 2 percent less than the open market, the price it announced Monday morning, before the collapse, was actually 10 percent less than the previous day’s closing price. And on Tuesday, the Central Bank’s website didn’t even carry a quote. In fact, the website deleted the entire box where it previously announced the 2 percent discount rate.
The government’s public emphasis Tuesday was on possible police action to stabilize the rial. Commerce Minister Mehdi Ghazanfari said, “We have greater expectations that the security services will control the sources of disruption in the exchange market. Brokers in the market are increasing prices because that is profitable, and there is nobody to control them.”
The government previously resorted to the police in January, the last time the rial collapsed. It then sent police into exchange shops to order lower prices. The result was that most dealers closed their shops until the police crackdown ended in a few days.
Ghazanfari was not specific about the “sources of disruption” he was blaming, suggesting his comments were just hollow rhetoric. Nor were police reported patrolling the exchange section of the Tehran Bazaar on Tuesday.
As of Tuesday night when the Iran Times went to press it appeared that the government did not yet have a policy for grappling with the rial’s latest collapse.
Based on past history, the most likely outcome was that the rial would stabilize on its own in the low-30,000 range for a number of months before once again plunging, probably beyond the 40,000-mark. But sanctions could change this old pattern and accelerate collapse.
US officials hope that will be true. Though they will not say so publicly, they generally see economic collapse in Iran as fomenting a public uprising that will topple the government or, at the least, force the government to end its policy of confrontation with the outside world and make a deal over its nuclear program in order to end sanctions.
In Washington State Department spokeswoman Victoria Nuland was almost boastful in placing credit for the rial’s collapse on sanctions. “From our perspective, this [rial collapse] speaks to the unrelenting and increasingly successful international pressure that we are all bringing to bear on the Iranian economy. It’s under incredible strain.”
She said sanctions are “cutting deeper and deeper into the Iranian economy and this is an important factor in trying to change the calculus of the Iranian leadership.”
This comment struck some as odd since the United States has been insisting that it wants to harm the Iranian government but not the Iranian people and the collapse of rial is devastating for the public. It was also seen as odd that Nuland did not even mention ineptitude in the Iranian government as a factor in the rial’s plunge.
However, during the election campaign, many Republicans have been criticizing the Obama Administration for not being tough enough on the Islamic Republic. With the election just eight weeks away, Nuland was probably driven mainly by a desire to portray the Administration as successfully harsh on Iran.
In Israel, Finance Minister Yuval Steinitz said the Iranian economy was “on the verge of collapse.” Most economists viewed that as hyperbole. But some analysts thought Steinitz was trying to make things look horrible in Iran to counter talks of a need for Israel to go to war with Iran soon.
