On the open market, the rial has lost 13 percent of its value this week.
President Ahmadi-nejad intervened Tuesday to say his government would do everything possible to prevent the currency from plunging further. He said this could be done by relying on Iran’s “huge reserves” of foreign currency. But he didn’t say why the government had not already done that if it really had “huge reserves.”
Confidence in the rial is rapidly disappearing, partly as a result of growing sanctions and the political pressures the Islamic Republic faces. Iranians have been increasingly buying gold and foreign currencies as a hedge against the collapse of the rial.
Much of the rial’s decline, however, stems from the government’s own policies. President Ahmadi-nejad ordered bank interest rates pushed down below the rate of inflation. That means no one wants to put their savings in a bank in rials because the deposit is guaranteed to have less purchasing power when withdrawn. That policy has sharpened the move to other currencies and to gold.
On top of that, the government is said to be scrounging for funds anywhere it can find them to keep up the bi-monthly welfare payments to every citizen. The government has reportedly dunned the banks for cash to make the payments.
The regime has also restricted cash withdrawals and allows banks to sell no more than $2,000 a year in American currency each year to each citizen traveling abroad. That drives travelers to the money changers in the street and depresses the rial yet further on the free market. People in the street were asking why those limits were imposed if the government really did have “huge reserves” of foreign currency.
Agence France Presse (AFP) quoted an unnamed source as saying the Central Bank was not getting many dollars any more. The source said that, because of US financial restrictions, Iran’s main buyers of crude—China, Japan and South Korea—no longer pay cash but instead pay local currency into local bank accounts from which Iranian buyers draw funds for imports. That reduces the resources available to the Central Bank.
An Iranian banker told AFP the Central Bank was limiting dollar sales to businesses as well as to citizens traveling abroad.
Prices vary from money changer to money changer. The Fars news agency reported finding dollars on sale in the Bazaar for 15,150 rials on Tuesday. It said the currency had plummeted against the dollar by 1,750 rials in just the preceding three days, a drop of 13 percent.
At the Central Bank, the authorities were still trying to defend the rial and ignore the free market. The Central Bank sold dollars for 11,005 rials Tuesday. That is not the highest figure. In June, the bank caved into the free market and jumped the price of the dollar from 10,599 rials to above 11,700 rials for five days. The price then began to descend rapidly and was back below 11,000 in another week.
The free market price also crashed rapidly at that time. There has never been an explanation for the sudden spike and equally sudden retreat in June. But some suspect manipulation.
The daily Javan reported last month that Iran effectively has a four-tier currency system functioning in the country once again. That was something the Central Bank tried to stamp out a decade ago.
Javan said the four rates are for: currency sold to travelers; open market sales in the Bazaar and on the streets; the official reference rate of the Central Bank; and the rate at which banks sell to money changers.
In the 1960s, Iran had one of the most stable currencies in the world with the rial around 70 rials to the dollar. After oil prices surged in 1973, Iran began to feel serious inflation, a fact that contributed to the 1979 revolution. With the revolution, however, the bottom dropped out of the rial. It has been on a steady decline ever since with periodic sudden spurts. One of those spurts appears to have begun again.
