By Bijan Khajehpour for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.
Recent fluctuations in the free market rate of the Iranian rial have caused concerns within the country’s business community that the currency may experience a sharp decline in value due to economic and political upheavals.
The Iranian economy has been operating with a multitiered exchange rate system for the past three decades. Currently, there are two official exchange rates: the official interbank (forex chamber) rate, which is used by banks for official hard currency transactions, and the so-called free market rate, which is used by licensed foreign exchange bureaus for all other transactions using the hawala system.
Traditionally, the free market rate has been a valid indicator of the mood in the Iranian economy. The last major collapse of the rial value came about in the second half of 2012 when harsh sanctions prevented the Central Bank of Iran (CBI) from repatriating needed hard currency to manage the artificially kept rate of 11,000 rials to the US dollar. At that time, the free market rate collapsed to 30,000 rials to the greenback and caused a massive backlash leading to major economic decline in 2013.
However, ever since the election of President Hassan Rouhani in June 2013, the free market rate had experienced a relatively stable period, gradually moving from 30,000 rials against the US dollar in the summer of 2013 to about 35,000 rials in the summer of 2016.
Notwithstanding, in the past few months, the Iranian rial has been experiencing a roller-coaster ride, and as of Jan. 4 the rial has lost about 13% of its value against the US dollar since Sept. 15, 2016. The decline of the free market rial/US dollar rate since the US presidential election amounts to about 7%.
The rate (currently at 39,500 rials to the US dollar) had actually reached 41,000 toward the end of December 2016, but bounced back when the CBI assured currency traders that it would. In fact, the governor of CBI, Valiollah Seif, has opined that the real value of the rial would be around 36,000 rials to the greenback. Respected experts such as Ali Dini Torkamani underline the fact that the CBI is in a monopoly position to determine the exchange rate; however, it is important to dissect some of the technical and psychological reasons that have led to the recent fluctuations.