The Iranian Currency Market: Will the Dollar Dip?

An Iranian citizen journalist, who writes under a pseudonym to protect his identity, wrote the following article on the ground inside Iran.

In order to predict the behavior of the Iranian currency market, we must first know the suppliers — in other words, the government and large non-governmental corporations with ties to government institutions and agencies.

After the nuclear agreement between Iran the group of P5+1 countries was announced, something happened that took everybody by surprise. Taking the past into account, it was expected that the value of the United States dollar would fall — not a historical drop but at the very least a modest fall.

But in the hours that followed the announcement of an agreement, the dollar fell a little, but then quickly bounced back. On July 14, for a few hours, it even gained in value.

But why has this happened? 

In an interview with Mehr News Agency, economist and university professor Mehdi Taghavi said that the release of blocked Iranian funds will mean that the value of the dollar will dip below 3000 tomans. But now, close to two weeks on, this prediction has not been realized, and it is unlikely that it will be in the near future.

On the other hand, Bahaodin Hashemi, who has sat on the boards of banks and financial institutions for many years, characterized a drop in hard currency prices as being unlikely. In interviews with various news agencies, he argued that nothing concrete had happened and called the variation in currency prices “an emotional response”.

In an interview with Tasnim News Agency, Hashemi pointed out that a number of factors influence the strength of the dollar — for example, the summer months often see a spike in international travel, making the dollar more desirable. In addition, he said, a number of merchants delayed paying their bills pending the outcome of nuclear negotiations. A quick look at the market seems to support Hashemi’s argument, especially given the fact that the majority of Iranian funds remain blocked.

 

Oil and the Economy

A basic economic principle says that a market consists of both supply and demand. That is how prices are shaped, in the balance between supply and demand.

How does the dollar get into Iran? It is obvious that dollars come from foreign trade but who does the trading? The short answer: the government.

In recent years the Iranian economy has tried to move towards so-called “non-petroleum” exports, but so far it has not been successful. What passes for non-petroleum exports are in reality a bundle of products derived from petroleum. We know who exports the crude oil but what about the rest of the exports?

From a total of $11 billion non-petroleum exports in the first three months of the year, close to $3 billion came from liquefied gas and close to $4 billion from petrochemical products. In other words, nearly 58 percent of Iran’s non-petroleum export market is controlled by industries affiliated with petroleum.

No matter how you look it, the Iranian economy is still dependent on oil — and oil is nationalized and controlled by the state. This means that Iran’s foreign trade consists of crude oil exports and, to a lesser degree, the export of petroleum products. This small sector might not be wholly state-run, but neither is it entirely private. It belongs to state-run agencies such as the government’s social welfare unit and other agencies.

So in the currency market we have one, and only one, major supplier: the government.

Nearly 80 percent of the dollars in Iran’s currency market are supplied by the government and, again, it is supply and demand that decides these hard currency prices. In exceptional circumstances, as in 2011, the government might not have the resources to satisfy the demand in the marketplace. But under positive conditions, including current conditions, it is unlikely that President Rouhani’s administration, which prides itself on avoiding the emotional tendencies of the past, would behave unpredictably.

 

A Stable Dollar: Who Benefits?

Immediately after the nuclear agreement was announced, the Minister of Industry, Mines and Commerce announced that prices for domestically manufactured vehicles would not be reduced. If currency prices experience a significant drop, then Iran’s two giant car manufacturers will be forced to lower their prices — and this will not be good for them.

In addition, the drop in the price of oil, which affects both the crude oil and the petroleum-based products, means that exporters rely on hard currency being high in price. Big petrochemical companies, all connected to one central point, bring dollars back in to Iran; it is only logical that these companies would not want to reduce their profits. The government then converts the revenue from selling oil into Iranian rials and then deposits this in to the treasury. A cheaper dollar means the government has fewer rials in its treasury.

By taking all these factors into account, it seems unlikely that those who benefit from the rise of dollars in the market — big petrochemical companies, car manufacturers, exporters and the government itself — would want a cheaper dollar.

Of course, on a macroeconomic level, with inflation largely controlled and with better prospects for foreign investments in Iran, there is not much justification for lowering the price of the dollar.

But lowering the price of currency by decree would have another consequence — a negative effect on domestic production. If there is no profit in domestic manufacturing then the capital engaged in manufacturing will move towards imports, like it did for eight years under President Ahmadinejad, and this will hurt employment in Iran.

Exporters present their dollars to the Iranian market. As a result, a cheap dollar cannot help their profits. On the other hand, a cheap dollar means that foreign products would sell at a lower price. Consumers would then turn towards cheap foreign imports and domestic production would suffer because it would no longer be as profitable.

And this outcome is not at all what the government — the main supplier of currency — wants to happen.

 

Hamid-Reza Shafé, Citizen Journalist, Tehran

 

Related articles:

Nuclear Agreement & Economy Survey

The Economy That Diplomacy Couldn't Fix

 

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