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Features

Can Iran Withstand the New Dollar Price Hike?

August 19, 2021
Bahram Khodabandeh
3 min read
The price of the dollar recently hovered close to 27,000 Iranian tomans for three days straight
The price of the dollar recently hovered close to 27,000 Iranian tomans for three days straight
Those expecting Ebrahim Raisi's electoral win would ease the tremors in Iran's foreign currency market have been left disappointed
Those expecting Ebrahim Raisi's electoral win would ease the tremors in Iran's foreign currency market have been left disappointed

On Tuesday, August 17, a single US dollar was trading for around 26,900 tomans on Tehran’s open market. This was the third day in a row the dollar was inching towards 27,000 tomans apiece. But it has yet to quite cross that threshold.

A small group of foreign currency investors in Iran might be happy, under the illusion that their investments are safe for now. But this sudden jump is not dissimilar to an aftershock in an earthquake-damaged building; ultimately what remains will be brought down on everyone’s heads.

Some analysts attribute recent, drastic fluctuations in the price of foreign currency to events in Afghanistan, particularly the fall of Herat and Kabul. No doubt these developments will have been a factor but by itself, the explanation is too simplistic. Domestic factors play an abiding and decisive role on both inflation and the value of the toman.

Iran’s currency revenues and outlays are not balanced. The Treasury reports that in the first two months of this Iranian calendar year, from March 21 to May 21, just 2.5 percent of oil revenues predicted in the budget were realized. More than a quarter of the total budget for this year was supposed to come from oil revenues. This shortfall directly affects the level of foreign currency reserves and also causes higher inflation.

The national data on foreign trade in the past three years shows revenues from non-petroleum exports – not all of which is returned to Iran – don’t even cover state-approved imports, let alone other imports that reportedly cost around US$12 billion a year. Capital flight is said to be as high as $15 billion per year. Then there are other, smaller outlays, such as tuition and travel expenses for students who study abroad and, of course, the currency demands of domestic investors, for which no accurate figures are publicly available.

Demand Exceeds Supply

One thing that is clear is there is greater demand for foreign currency in Iran than there is supply. Until and unless Iran resolves the issue of sanctions and can resume the flow of petrodollars, any hope that the price of the dollar will stabilize is absurd.

Some believed the new, total dominance of the regime – with Ebrahim Raisi’s government in perfect ideological harmony with the unelected state – would reduce foreign policy tensions and lead to the end of the sanctions regime. As of now, though, there is nothing to indicate the US will return to the JCPOA anytime soon.

If this situation continues, it will have a devastating effect on all sectors of the Iranian economy, including the currency market. This week’s tremors in this market may preclude a new, more seismic earthquake. Meanwhile, the belief that foreign currency prices are about to soar has prompted a rush of first-time buyers and concurrent price hikes.

“I believe that if nothing happens with the JCPOA and the current situation continues, the price of the dollar will go above  30,000 tomans,” Kamal Seyed Ali, former deputy governor of Iran’s Central Bank, told Iranian Labor News Agency (ILNA) on Tuesday. “But if the JCPOA is revived, if we can sell 2.5 million barrels of oil and if oil revenues go up then we’ll have no problem in controlling the currency market.”

Does such a possibility exist? Seyed Ali noted: “Even though the economic team [of Ebrahim Raisi] has yet to be confirmed by parliament, the lineup has not built confidence. This, too, affects the market. We must remember that expectations of higher inflation strongly affect behavior patterns. These expectations go beyond economic issues: people are waiting to see what happens next.”

 

Related Coverage:

Iranians Shocked by the Overnight Devaluation of Their Currency

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Iran's Missing Dollars; Who Took Them, and How Much?

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

Government Study Shows Up to 34.8 Percent Inflation Rate in Parts of Iran During the Pandemic

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