The huge changes announced last Wednesday had the instant impact on the market that the regime hoped for. The rial ceased its stunning free fall and improved substantially against the dollar.
For a few days.
But when the small print of the new rules were announced and everything took effect Saturday, the changes did not amount to very much. And the rial’s fall resumed.
The regime’s main policy to try to control the currency remained what it had been—coercion. On Tuesday, for example, money changers on the sidewalks of Ferdowsi Avenue were rounded up by police and carted off, the Fars news agency reported.
The regime has also tried to block the free flow of information about exchange rates to foil the open market. Access to Mesghal, the website that is most commonly used for price information, was blocked within Iran two weeks ago. Still, many Iranians could get around the filter. But Mesghal, which normally has updated its information every few hours, last posted a rate for the dollar at 5:37 p.m. Tehran time Sunday.
Some news reports had the rial bottoming out at 22,500 rials to the dollar last Tuesday, January 24. Mesghal showed a rate then of 20,000 rials per dollar that day.
The next day, the regime announced it was devaluing the rial and boosting interest rates. Mesghal then posted a rate of 17,000 a few hours later and 16,000 on Thursday. On Saturday, when the new rules took effect, however, Mesghal posted a rate of 16,700. On Sunday the rate went to 17,300—and Mesghal has been silent since then.
The implication was that the announcement of major reforms calmed the markets, but decline set in once the public saw the changes didn’t amount to much.
The official Central Bank exchange rate was 11,296 rials to the dollar on Thursday. The new rate after devaluation was 12,260 rials on Saturday—and the regime did not change that rate through Tuesday when this story was written.
That was a devaluation of 8.5 percent. Of the 26 currencies for which the Central Bank posts daily rates, most saw the rial devalued by more—9.5 percent in the case of the euro and 10.5 percent, the highest devaluation, vis-à-vis the South African rand. It appeared the Central Bank was trying to resist devaluing even more against the dollar for political reasons.
But the Mesghal free market dollar rate on Sunday was still 41 percent higher than the official rate, meaning that the official rate remained mythical as before.
The most important element in determining price is the availability of dollars at the official rate. The Central Bank announced last week that as of Saturday and the new rates, Iranians could buy all the dollars they wanted. That turned out to be a lie.
Central Bank Governor Mahmud Bahmani went on state television last Wednesday and announced unequivocally: “We will provide foreign currency in any amount” as of Saturday. “There will be absolutely no need to go to the open market to procure foreign currency. The banking system will meet all of the people’s needs.”
The full policies relating to exchange sales to importers and licensed currency dealers are still not known. But citizens who walked into banks Saturday found the rules for them had not changed.
An Iranian resident planning to take a trip abroad can still buy $1,000 in US currency when they show their travel documents. That is no change. An Iranian who lives abroad—for example, an Iranian-American—can buy up to $2,000. A non-traveling citizen can buy nothing at the banks—the same as before.
What few noticed in Bahmani’s comments last week were his nuances. He said, “The government will not give foreign currency for storage [as savings],” thereby limiting foreign exchange sales to those with a legitimate “need” as recognized by the government.
Without more funds available from the banks, Iranians will continue to resort to the open market—and that will further depress the rial, assuming that Iranians continue to want to put their money in US dollars for safekeeping.
Ahmadi-nejad claimed last week that Iran has $90 billion in foreign currency reserves earned from oil sales. But few analysts believe that. The US banking restrictions make it very difficult for people abroad to pay Iran anything. China is understood to be buying Iranian oil with its own currency deposited into an Iranian account in China. This works because Iran buys huge quantities of goods from China, paid for from that oil account. But it also means that Iran has no dollars or any other currency coming to Tehran from China. India wants to pay Iran for oil the same way. But Iran buys very little from India so Iran has no interest in such an arrangement.
Many in Iran believe the flight from the rial is caused by fear over the impact of sanctions and the possibility of war. There is no doubt that has some impact. But economists put the main blame on the fact that the Ahmadi-nejad Administration last spring forced interest rates paid on bank deposits down far below the rate of inflation. It thus became irrational to place savings in a bank because the bank was offering a guaranteed loss in value. The public started buying dollars, sending money abroad, stocking up on gold and purchasing real estate.
The Central Bank said early last month that it would raise bank interest rates above inflation to cure that problem. The price of the rial immediately stabilized. But President Ahmadi-nejad returned from a week in Latin American to veto that plan January 18. The rial then went into a tail spin, losing 14 percent more value in the next few days, according to the Mesghal figures.
Ahmadi-nejad then saw the light and reversed himself, it was announced last Wednesday. The open market rate immediately improved, indicating that interest rates are a very important driver of the rial’s open market value.
But the new interest rates published Saturday are still below the rate of inflation—and the rial resumed its fall when those rates were announced to the public.
The last officially published inflation rate was 19.8 percent for last November. But officials have said the inflation rate has now surpassed 20 percent.
Here are the new rates paid on bank deposits. The percentages are the annualized rates paid.
Time Rate
<3 months 7%
3 months 10%
6 months 12%
9 months 15%
1 year 17%
5 years 20%
The old rates included 12.5 percent for one year and 15 percent for five-year deposits. So the rates are up a substantial 5 percentage points—but still below inflation—so a return of savings to the banks would appear unlikely.
Deputy Alaeddin Borujerdi, the chairman of the Majlis National Security Committee, blamed Ahmadi-nejad’s policies for the financial disaster. He didn’t blame sanctions or war threats. In fact, he commented, “Even during the [Iran-Iraq] war, we did not witness such instability.”
The official rate for the dollar has now fallen 18 percent since last April when interest rates were forced down by Ahmadi-nejad.
The Central Bank also announced that as of Saturday licensed foreign exchange dealers were allowed to sell currency at a markup of only 3 percent to 5 percent above the bank rate, a standard that appears to be have been ignored.