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Iranians Shocked by the Overnight Devaluation of Their Currency

October 6, 2020
Kamran Karimipour
6 min read
On October 4, 2020, the price of the US dollar in the Tehran foreign exchange open market fell by 1,200 tomans
On October 4, 2020, the price of the US dollar in the Tehran foreign exchange open market fell by 1,200 tomans
Abdol Nasser Hemmati announced on Friday, October 2 that exporters had paid back $8 billion of their foreign exchange liabilities, a move that could cause the dollar price to fall
Abdol Nasser Hemmati announced on Friday, October 2 that exporters had paid back $8 billion of their foreign exchange liabilities, a move that could cause the dollar price to fall

On October 4, 2020, the price of the US dollar in the Tehran foreign exchange open market fell by 1,200 tomans, sparking hope for many. But what exactly happened?

1- The price of the dollar reached 28,300 tomans on Sunday, October 4, 2020, with a decrease of 4 percent compared with the previous day. Compared to the highest price recorded last weekend, the dollar fell by 6 percent in two days. This decrease is the most dramatic in the last two months.

2- It is still too early to assess the situation in the foreign exchange market. But looking back over the last few days, it is not as dramatic as it might seem. The reduced price of the dollar on October 4 is still 850 tomans more expensive than it was on September 22, and about 1,050 tomans more than on September 20. So even though there was a significant decrease in prices on October 4, the foreign exchange market has not yet reached where it was on September 22. So it is still too early to assert that a corrective process has begun in the foreign exchange market. It will all depend on how the market responds in the coming days.

 

Price of US Dollar in the Open Market in the Last 17 days

Sunday, October 4: 28,300 tomans

Saturday, October 3: 29,500 tomans

Thursday, October 1: 29,900 tomans

Wednesday, September 30: 29,900 tomans

Tuesday, September 29: 29,600 tomans

Monday, September 28: 29,400 tomans

Sunday, September 27: 28,960 tomans

Saturday, September 26: 28,700 tomans

Thursday September 24: 28,650 tomans

Wednesday, September 23: 27,950 tomans

Tuesday, September 22: 27,450 tomans

Monday, September 21: 27,250 tomans

Sunday, September 20: 27,250 tomans

Saturday, September 19: 26,400 tomans

 

Source: Daily reports from Donya-e Eqtesad

 

3. Some analysts have compared the volume of Sunday's fall in prices with the fall in mid-August. But what happened in mid-August when the dollar fell so sharply? Has the situation been repeated, or was there a different reason for the fall in the dollar this time?

Based on calculations, the amount of the recent decline in the price of the dollar is the heaviest drop since mid-summer. But the situation two months ago was completely different. By mid-August, the stock market's unprecedented growth had affected all parallel markets, including the foreign exchange market. The situation was such that some people were selling their homes and storming the stock market. Under such circumstances, it was natural that people wanted to sell the dollar, and this therefore increased the availability of the dollar in the market. On the other hand, the desire to buy decreased, leading to a decline in demand. This situation lasted until August 9, the day when the index of the Tehran Stock Exchange touched its highest historical ceiling and then started to fall. Within a few days, the price of the dollar began to rise and the balance between the supply and demand shifted. Concerns about the stock market crash led many to withdraw their capital from the stock market and move to parallel markets, such as currency, gold, and property. The stock market continued to decline until a relative equilibrium was reached in mid-September, but the foreign exchange market not only did not reach equilibrium, but for various reasons, continued to rally on a sharp upward slope until early October. If the reason for the increase in the price of currency over the last two months could be determined, it might be possible to make a better guess regarding the answer to the question of why prices fell in the Tehran market on Sunday, October 4.

4 - Some seriously believe that the reason for the increase in currency prices is the general excitement in the market. But if there is excitement, why did this wave of excitement suddenly subside on October 4? Has the market has been so affected under the pressure of the economic crisis that emotional shocks do not have the impact they once did? 

The details of Iran's foreign exchange reserves are not accessible, but it is absolutely clear that the volume of Iran's foreign exchange deficit over the last two and a half years has been so negative that the Central Bank is no longer able to inject dollars from foreign exchange reserves into the market to control prices. In such a situation, people rush to the market for foreign currency, and it is natural that when the amount of currency in the market is limited, prices rise.

5- But who goes to the market to buy foreign currency? A group of small investors buy dollars to maintain the value of their money, but these same investors sell their dollars and deal in parallel markets if another more profitable market is found. Nothing particular happened in the stock market on October 4, and the downward trend in gold prices was faster than the stock market, so something else caused the change. The fact is that, at the moment, the majority of people buying foreign currency are those who need to import commodities or are in urgent need of dollars. When the volume of the dollar is low in the official markets, even for official importers, these buyers inevitably turn to the free market. However, as soon as the dollar is injected into the official markets, the demand in the free market suddenly falls and then prices fall. Therefore the dollar must have come in from official sources on Sunday, October 4.

6. Abdol Nasser Hemmati, the governor of the Central Bank, announced on Friday, October 2, that exporters had paid back $8 billion of their foreign exchange liabilities. This amount is not a significant figure on the scale of Iran's foreign exchange market. But under unusual market conditions – a market that in recent weeks had been sensitive to the injection of even $300 million — it could cause prices to fall, at least for a short period of time. But how long can this process continue?

7- As the head of the Central Bank has said, the balance of the exporters' liabilities is $19 billion, a little more than twice the amount of foreign currency that has just been injected into the market. This liability comes from the export licenses issued in 2018 and 2019, when the export conditions were much better than they are this year. If we assume that, in a very unlikely scenario, all foreign exchange resources produced from these liabilities enter the market within one month, the price of the dollar will definitely fall further. But what will happen next? Will any foreign currency be injected into the market again? Or will the Central Bank be broke again?

8- There is no doubt that the country's foreign exchange earnings in 2020-2021, due to the coronavirus pandemic, reduction in oil prices, and the tightening of sanctions, are even lower than they were in 2018 and 2019. There is no guarantee that what happened in the last two years will not happen again this year: that is, the exporters do not return their liabilities, for whatever reason. In this case, what will happen to the foreign exchange market in the coming months? If Iran does not find a way to lift the sanctions — in the short term and within a few months — it is not clear what the situation will be as Iran enters the last months of the 2020 to 2021 period.

 

Related coverage: 

A Day in Tehran’s Gold Market

Oil, the Dollar and Inflation: How Far Can the Economic Crisis in Iran Go?

 

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