The Iranian Students News Agency (ISNA) Saturday quoted Arsalan Fathipur, chairman of the Majlis Economic Committee, as saying the government had adopted a three-tiered system for the rial.
That was swiftly denied. The three-tiered system is Fathipur’s proposal, but it has not been adopted—not yet, at least.
The regime got rid of a multi-tiered exchange system only 10 years ago. It is hotly opposed by economists and bankers. But the Islamic Republic is now facing some of the same economic constraints that it faced in the 1980s when it adopted the first multi-tiered exchange system.
Under Fathipur’s proposal, the government would continue to sell dollars at the official rate of 12,260 rials to the dollar only for “basic goods,” presumably mainly food and medicine.
A new rate of 15,000 rials to the dollar would be used for “capital and intermediate goods,” apparently meaning most imports.
Dollars for importing luxury goods such as “cars and toys” would have to be bought on the open market, where the price is currently around 19,000 rials to the dollar, Fathipur said.
But Economy Minister Shamseddin Hossaini objected vocally. “We do not agree with such a plan,” he said. “We are even opposed to having two different exchange rates, let alone multiple rates…. Our policy has always been directed at getting to a single rate of exchange.”
Other members of the committee said the plan was Fathipur’s proposal alone and had never been approved by the committee, let alone the Majlis as a whole.
Still, many people think the regime will be forced to go to multiple tiers eventually. Djavad Salehi-Isfahani, an economics professor at Virginia Tech University in the United States, told The Washington Post a multi-tiered system was “inevitable when you have sanctions and capital flight.”
The fundamental problem is that Iran is earning fewer dollars now that sanctions have cut oil sales by more than half. With fewer dollars, the Central Bank cannot satisfy demand and political pressures are likely to grow to protect basic food imports with dollars sold cheaply while pushing others onto the open market, which will then drive the rial down still further.
The Fathipur proposal would effectively devalue the rial by 22 percent to 15,000 rials. That is based on the assumption that most imports would cost 15,000 rials per dollar with only a minority of necessities going any longer for 12,260 rials, the rate that was set in January.
The multi-tier system was first developed during the Iran-Iraq war. But it has always been opposed by economists and bankers as creating economic chaos and opening the door to more corruption.
When Ali-Akbar Hashemi-Rafsanjani became president in 1989, he campaigned to get rid of the multi-tier system, but it wasn’t finally done away with until 2002.
The system worked well for a few years with the official rate being adjusted daily to reflect the slowly sinking value of the rial. But a few years ago, the Central Bank began holding down its sale price and the open market began to sell dollars for increasing sums, opening up a yawning gap between the official rate and the open market rate.
