The official rate of 12,260 rials to the dollar—fixed in January—is used for official imports, including food, so a further devaluation will drive up the cost of food still further. The surging price of food is already exacerbating social tensions.
The announcement of the planned devaluation signaled the weakness of the rial and prompted a crash on the open market where the rial lost 9 percent of its value over Sunday, Monday and Tuesday. In the longer term, it has lost 15 percent over the last 2 1/2 weeks and 24 percent since Now Ruz. The open market price of the dollar Tuesday was 21,830 rials.
Over the decades since the revolution, the rial has hit periods of sudden value loss every year or two interspersed with long periods of slow decline. But the last sudden drop was a mere seven months ago in January.
The official inflation rate as recently published is 22.8 percent. But private economists have told The Wall Street Journal they believe the real inflation rate is more like 60 percent. In that context, a sudden decline in value is not surprising.
The latest fall of 9 percent in three days started Sunday after Central Bank Governor Mahmud Bahmani said he would announce a revision “within the next 10 days” to the govern-ment’s official exchange rate of 12,260 rials to the dollar.
Bahmani signaled that the main problem was sanctions. “There is no reason to spend our money [on imports] when we are under sanctions,” he said. “We should remember that we might need to manage our country for a long time with this money.” That last remark hinted that Iran’s reserves are falling rapidly.
As a result of the new American and EU sanctions, which took formal effect June 28 and July 1 respectively, Iran is selling less than half of the crude it sold last year, curtailing income—though it must be remembered that oil prices remain more than double their average in most years so Iran is hardly poverty stricken.
On top of that, however, US banking restrictions that began in 2005 and have become progressively tighter since then have made even simple banking transactions more difficult and driven up the cost of doing business.
But the sanctions only began to bite after 2005 while the rial has been falling ever since 1979. Even without sanctions, the economy has long been in trouble because of lax management.
The Reuters news agency said most open market currency dealers stopped selling dollars Monday and removed signs posted in their windows advertising dollar sales rate.
In January, faced with a collapse of the rial on the open market, the government set the exchange rate at 12,260 rials to the dollar and said that was fixed and immutable. In one sense, that was amusing; the government was locking the rial to the dollar, which President Ahmadi-nejad had for years said was a worthless commodity on the verge of collapse. Ahmadi-nejad has said nothing about the dollar since January.
The government said it would enforce that new rate on the open market as well. That didn’t work for even an hour. Open market dealers either sold the dollar for more or closed their doors. In March, the Central Bank accepted reality and said it would allow the open market to operate freely.
The chart on page five shows the daily changes on the open market since Now Ruz.
Mohammad-Reza Ranjbar-Fallah, the chief at Bank Tajarat, told the state news agnecy he expected the new official rate would be in the range of 15,000 to 16,000 rials per dollar.
The decision to devalue further may mean that Iran’s foreign exchange reserves are falling rapidly, despite government boasts that it is wallowing in foreign funds. Devaluing by, say, 10 percent would automatically raise the value of the regime’s reserves by 10 percent and allow it to continue functioning that much longer.
It might also discourage corrupt practices, where officials with access to foreign exchange at the official rate use it to bring in imports they can sell for much more. However, if the new official rate continues to be far lower than the open market rate, the incentive for corruption will remain.
Some economists cautioned that an official devaluation might well lead to further decline on the open market as the official devaluation leads the public to believe the worst about the prospects for the rial. One economist told Reuters, “If the government rate becomes 17,000 rials to the dollar, the free exchange rate will become 26,000.”