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Rial plunges to 20,500 to US$

again, plummeting to 20,500 rials per dollar on the open market Monday, by far the lowest it has ever been.

 

The rial has lost a quarter of its value in just the last three weeks.

No end is in sight.

President Obama says the Iranian economy is now in a “shambles.”

The rial began its latest plunge last month.  The government stumbled for awhile and then finally settled on a policy of coercion—banning unlicensed sellers from the streets, ordering licensed sellers to market dollars at 14,000 rials and even blocking websites that report the dollar price on the street.  The unlicensed sellers just went underground and the licensed sellers refused to sell at 14,000.  And it was the state news agency that reported the currency at 20,500 rials per dollar on Monday.

Part of the problem is political and psychological;  the rise in tensions with the West and the increasing sanctions have frightened Iranians.  But the decline in the rial actually began before the latest political crisis.  Central Bank Governor Mahmud Bahmani believes there is a fundamental problem with the Ahmadi-nejad policy of forcing him to keep interest rates lower than inflation.

Since last April, the interest payable on one-year deposits has been 12.5 percent while the official rate of inflation is near 20 percent.  That means those keeping their money in a bank are losing because the interest paid doesn’t even cover inflation.

Bahmani has wanted to raise interest rates to a few percentage points above inflation.

Two weeks ago, he announced the bank would do just that.  He didn’t say when, but the value of the currency stabilized at around 16,500 rials to the dollar.  Then Ahmadi-nejad returned from a week-long trip to Latin America and overruled Bahmani.  The government announced last Wednesday that interest rates would remain unchanged.

The rial then resumed its fall.

The Mehr news agency said Bahmani had told reporters, “I would kiss the hand of anyone who would remove me from this job.”  Other news reports spoke of him feuding with Ahmadi-nejad.

The public is deserting the rial for anything they think may preserve value.  The dollar is just one depository.  Gold is also popular and gold prices are soaring.  Since early December real estate prices in Tehran have spiked as the public moves savings into land and buildings.  There are reports of people buying furniture and consumer goods on the assumption they will preserve value better than the rial.

Even the White House is aware of the disaster in Iran’s financial market.  President Obama last week told people at a New York fundraiser that sanctions have been “so effective even the Iranians have had to acknowledge that their economy is in shambles.”

Last Tuesday, just before Ahmadi-nejad vetoed a hike in interest rates to lure rials back to the banks, the Majlis summoned Bahmani and Economy Minister Shamseddin Hossaini.  The two pledged to stabilize the market in just days with no difference between the official and black market rates.  At that point, the free market rate was 60 percent above the official rate.

The free market price is now 80 percent above the official price posted each morning by the Central Bank, making the Central Bank figure little more than laughable.   But the Bank does recognize the rial is plunging.  The official price passed 11,000 December 19, 11,100 five days later on December 24, 11,200 14 days later on January 7 and 11,300 16 days after that on January 23.


 

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