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Currency Plummets as Corruption and Incompetence Continues

April 18, 2018
Behrouz Mina
5 min read
Currency Plummets as Corruption and Incompetence Continues

The recent fluctuations in Iran’s currency exchange market have revealed the country’s economic vulnerabilities once again, as well as confirming the government’s limitations when it comes to market control. A week on from the currency hitting a new low, Hassan Rouhani’s administration is still trying to control the currency market — measures experts believe simply boost the black market for currency.

Iran’s currency, the rial (IRR), recently lost its value in yet another freefall. The exchange rate reached 60,000 rials to the US dollar, setting a new low and breaking a mental barrier at the same time. Only a month ago, Iranians could not even have imagined such a dramatic fall. But now many are lining up to exchange their diminished rials for hard currencies, including the dollar, the euro and sterling. 

But despite this huge demand for hard currencies, the Central Bank of Iran (CBI) continued to sell hard currencies at the official exchange rate, which were and still are much lower than market rates. Until recently, people who had been granted an official permit to import essential goods were able to buy US dollars from CBI at the rate of 37,830 rials per dollar, amounting to a 60 percent price gap between this value and the open market value. To tame the market, the CBI devalued the rial, bringing it down to 42,000 against the dollar. But the new rate still sits 42 percent below the market value. Such gaps encourage what is known as rent-seeking behavior — a push to boost economic gain without actually feeding back into society or the economy. In this climate, those with the political leverage to coax CBI to receive currencies at official rates are presented with an excellent opportunity to abuse the exchange market in Iran for personal gains. 

This is not the first time over the last decade that Iranians have experienced a significant fall in their currency — and the panic that goes with it. They know that it could result in another bout of high inflation. Although economists normally consider inflation to be the cause for currencies losing value, many Iranian experts argue that the economy’s dependence on imports means higher prices, and, as a result, merciless levels of inflation. 

In 2009, as Mahmoud Ahmadinejad began his second term as president, Iran had an inflation rate of 10.9 percent; the exchange rate for the rial against the dollar was 10,000 to the dollar. 

In under four years, the International Monetary Fund recorded Iran’s inflation to be at 34.8 percent, with a market exchange rate at 39,800 rials per dollar. The dollar grew more than 350 percent against the rial. Between 2011 and 2013, the rial lost its value mainly because of its diminished power in foreign trade caused by sanctions, as well as the government’s expansionary monetary policy. Today, Iran’s economy is experiencing a similar phenomenon, but for different reasons.

 

The Power of Hope

Between 2013 and 2016, Iran’s currency bounced back somewhat, partially due to the introduction of a responsible monetary policy to control inflation, and also because Iranians expected a nuclear deal would end their economic troubles. Hope is a powerful economic factor. Iranians believed their assets would retain their value and the economy would rally. Hassan Rouhani promised to lift sanctions and to incorporate Iran into the global economy. Iranians believed him. And they expected an end to sanctions would initiate rapid growth and create employment opportunities. These expectations remain unfulfilled. 

It is true that in the fiscal year of 2016-2017 Iran experienced a two-digit growth rate of 12.5 percent, which is the figure CBI has provided. However, this was due to oil export revenues. GDP growth, without taking oil production into account, stood at 3.3 percent, according to CBI figures. As Iran’s political establishment reaped the gains of the Joint Comprehensive Plan of Action (JCPOA) and to oil revenues, Iranian people were left to fend for themselves, faced with an economy that had changed very little and was still crippled by corruption and mismanagement. As private businesses sought opportunities to grow, they had to deal with the regime’s increasing hostility toward foreign investors and private entrepreneurs. Iran’s political establishment made sure it remained in full control of the economy by discouraging any significant financial interaction outside the public sector. A more competitive economy did not emerge, and despite sanctions being lifted, the economy stayed closed off from the global banking network.

 

Incompetence and a Missed Opportunity

 This meant Iran’s economy remained particularly dependent on the JCPOA — and drastically exposed. As President Trump vowed to drop out of JCPOA in the run up to his election and throughout his first year as president, Iran’s markets felt the brunt of this risk. President Rouhani’s administration tried to maintain the rial’s buying power artificially by pumping revenues earned from oil and petrochemical exports into the market. But Iranians have become savvy when it comes to money. They have already been victims to sanctions. As a result, they rushed to convert their assets to hard currencies and buy insurance in order to face an uncertain future. This reaction reaffirms that Iran’s economy is still subject to political machinations, and that is still not part of the global economy. 

Though critics are lining up to blame Hassan Rouhani’s government for a flawed currency policy, it is important to remember that his administration has also failed to integrate Iran’s economy into the global economy. Its failure to connect Iranian banks with the global banking network is particularly striking and obvious. Iran’s private sector and the Iranian people are forced to depend on currency smugglers, who use imports and exports, tourism and border markets to convert the rial to the dollar and bring back the cash for sale in Tehran. The government has refused to either acknowledge or take control of this reality. And Iranian banks lack both the expertise and the resources to support this segment of Iran’s regional trade. Their incompetence is yet another reason why Iran’s economy has missed the window of opportunity the nuclear deal offered. But for average Iranians in Tehran and other cities, this does not matter. They have no time to consider the roots of the problem they’re faced with as they line up to buy whatever currency they can find, whether it’s dollars, euros or pounds. They know they cannot rely on their government. And they know their economy is in need of globalization, not further government controls and edicts — even as President Rouhani and his government fail to accept this. 

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