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Business | The Rial's Freefall: A Historical Perspective


12 Oct 2012 20:22Comments
13910715151154818_PhotoL.jpg International sanctions, the government's lack of fiscal discipline, and Iranians' memories of hardship combine for chaos.

[ news analysis ] On October 3, the U.S. dollar reached a new high of 40,000 rials in the Tehran open market; only a week earlier, even the most pessimistic analysts would have thought the rial's freefall would not pass the 30,000 benchmark. As one businessman put it mournfully, "Thirty thousand rials per dollar was a nightmare; now it is a dream." The Tehran bazaar closed down, partly in protest and partly in confusion over what to pay and charge for goods. Was the rial's sudden fall predictable? Many Iranian economists say yes. One might next ask why the dollar has such a prominent place in Iranians' daily lives that its soaring value could prompt this month's protests and retail shutdown.

Nahid, a 65-year-old housewife and retired nurse, remembers the days when "a dollar was only seven tomans." (A toman is ten rials.) It was 1978, the exchange rate had been stable for a long time, and Iranians had easy access to hard currency. Then the Revolution came, followed by an eight-year war with Iraq. "The rate of seven tomans became something of a fairytale," Nahid says. With war came inflation. "I had two daughters. Everything became scarce and expensive." Her husband, a public employee, did not earn much. "The rising prices and the rent swallowed our paychecks as soon as we received them." What little they could put into a savings account "became worthless in a month or two.... I quickly realized I needed to save in things whose value would increase with inflation." She started to buy hard currency and gold coins.

Nahid's story is far from unique. Afsaneh, 38, an accountant and mother of one, said she vividly remembers in the 1980s following her parents through Istanbul Square, the center of the currency black market near the heart of Tehran. "My father would stop a total stranger and ask 'Dollar dari?'" Do you have dollars? The initial answer was invariably "no." "But then the seller would look at me and feel assured that my dad was not a government agent." Terms would be agreed upon and the cash exchanged.

"I learned Benjamin Franklin was a very important figure," she says. "He was equal to $100."

Her parents never acquired much at a time. "They always bought $100 here, $50 there." Years later, Afsaneh discovered that her parents had accumulated close to $5,000. "They sold that to pay for the down payment on an apartment."

These are typical stories of a people who have spent decades trying to adapt to high inflation and a volatile economy. Their stories also highlight another fact about the Iranian currency market. There is not a single market institution for currency in the country, but rather several. Nahid and Afsaneh referred to the market for hard cash: buying bills and printed money. The Iranian government has its own market, which operates via the Central Bank of Iran (CBI) and its distribution of hard currency through the banking system. Banks in turn sell that currency in the form of cash or credit lines to government agencies and private businesses authorized to receive them at the official rate. Banks also sell hard currency to travelers and other individuals. Iranian exporters use both markets to sell their income to receive the rials they need to pay for their expenses inside the country. When the gap between the official price and the market price increases, the exporters naturally take advantage by turning more to the open market. Then, as well, there is the money transfer market involving the large Iranian communities abroad in North America, Europe, Asia, and Australia. Using both banks and currency exchange stores, Iranian families engage in international money transfers.

The currency market remained volatile for most of the 1990s. For a time, Iran had three official exchange rates: one for industries, one for foreign travel, and one for the public sector. This created many opportunities for those seeking easy money. In 1993, the administration of President Akbar Hashemi Rafsanjani tried to unify the exchange rate for the first time, after the dollar jumped 75 percent over the official rate in the open market, in part because of a severe drought and falling oil prices. The government decided to sell currency through the banking system to any interested customer. Instead of the intended effect, however, the result was to encourage many ordinary Iranians to become currency speculators. People would buy dollars inside a bank at 4,000 rials each only to sell them to free agents for 7,000. A person who had bought $1,000 could make a profit of three million rials in a few minutes. In this light, little essential has changed in Iran's exchange market. The numbers are larger as well as the market ups and downs, but the cycle and the incentives are very familiar.

The Iranian government's efforts to unify the exchange rate succeeded in 2000, when a system of buying and selling hard currency and letters of credits via the stock exchange was introduced. As oil prices began to rise during reformist President Mohammad Khatami's second term, the market was assured that its demand for hard currency could be met consistently. The government injected dollars earned from selling oil into the market, keeping the exchange rate stable. This was not a new idea. Ali Manavi Rad, head of the CBI's Currency Office from 1979 to 1986, told Jam-e-Jam earlier this month, "This policy was something we inherited from the Pahlavi regime. During the 1970s, the CBI injected one billion dollars annually into the market to keep the exchange rate constant." As oil revenues rose during the early 2000s, so did imports, foreign travel, and study abroad. In a sense, Iran was repeating the 1970s, if in a less stylish fashion.

According to the Tehran Chamber of Commerce, Industries, and Mines, imports rose from $18.04 billion in 2000 to $57.47 billion in 2011, an increase of almost 220 percent. In 1995, the total number of passengers on foreign flights was 1.6 million, 16 percent of total air travel in Iran; by 2008, this number had reached 7.3 million, 36 percent of the country's total air travel. As imports and foreign travel rose, so did the demand for hard currency. Over the last three years of the Khatami administration, the unified exchange rate remained quite stable, rising slowly from 7,900 rials per dollar in mid-2002 to just under 9,000 rials in mid-2005.

In a great political/economic irony, Iran effectively pegged its currency to that of the United States. According to the Christian Science Monitor, between 2005 and 2011, Tehran earned an estimated $465 billion from oil exports alone. This revenue enabled the government to supply the ever-growing demand for hard currency. Several Iranian economists warned authorities that the exchange rate had been kept artificially low and that the market was increasingly vulnerable to changes in economic conditions. They predicted that any increase in foreign trade transaction costs would send the exchange rate soaring, causing economic turmoil and inflation. International sanctions ultimately produced just such an increase in transaction costs. But sanctions alone did not push the rial over the cliff.



As can be seen, the exchange rates for the dollar and euro in Tehran have been volatile since last winter. The rial actually gained significantly against both currencies in February and March, coinciding with the negotiations between Iran and the P5+1. In both cases, the business community was hopeful that a settlement would be reached. When their hopes did not materialize, the rial again began to lose value, gradually but steadily. As the threat of war loomed more gravely than ever and oil revenues plummeted, average Iranians began to realize that their immediate future could become unpleasantly eventful. Many remember the hardships of the 1980s and the volatility of the 1990s only too well. And there is another crucial factor.

The administration of President Mahmoud Ahmadinejad has long been criticized for its lack of fiscal discipline. Over the past seven years, the government has increased the domestic money supply exponentially, creating a phenomenon an Iranian economist has called the "blind beast of liquidity." Fearing for their future and desperate to maintain their purchasing power, Iranian families take measures that only worsen the situation.

In summer 2011, Iranians flocked to banks and jewelry stores to buy gold. The price of the government-issued gold coin known as the Bahar-e Azadi (Spring of Freedom) increased dramatically from 4.5 million to 6.5 million rials; by winter it had reached ten million. As the rial gained in February and March, the Bahar-e Azadi's price fell, only to rise again in the spring. Over the past two weeks, the Iran currency exchange market went through something similar, but on fast forward. According to Ali Reza, a 34-year-old businessman, "Many ordinary people are going to be buying hard currency, because it is a good investment and they fear inflation is coming."

The protests have ended and the bazaar has reopened under the watchful eyes of security forces, though no one is buying or selling dollars there or in Istanbul Square. Yet the unified currency exchange market is no more. Iranian businesses and government agencies in charge of importing essentials still have access to the official exchange rate of 12,260 rials per dollar. The ministries and other government agencies also receive their currency allotments at this rate. Meanwhile, the Syndicate of Currency Exchange rate is 28,500 rials per dollar, now supposedly being strictly enforced at sanctioned exchange shops; based on the value of gold, however, the dollar is priced around 30,830 rials.

As the government rushed to intervene two weeks ago -- enforcing tighter currency exchange rules, stopping currency sales to students abroad who are not on a government or public university fellowship, shutting down websites that report on the open-market trade -- new secondary and parallel markets came into existence immediately. People turned to those who "know someone who knows someone" to buy now increasingly precious hard currency, while government agencies are widely suspected to have profited from the recent drama. One Majles deputy, Orumieh's Nader Ghazipour, recalled that in the 1980s, many ministries sold their allocated currencies in the free market to pay for their projects.

"Now the ministers can go back to their real job -- rent seeking," he cheekily told reporters.

Copyright © 2012 Tehran Bureau

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