Why is Iranian Rial suddenly Weakening?

The diversity of views explains why the Rouhani administration’s objective of unifying the two-tiered exchange rate system has not been materialized four years after it was announced. Maintaining a two-tiered exchange rate system allows the administration and the CBI to introduce regulations to use the higher free market rate for some of the transactions without officially devaluing the rial.

The fact is that in Rouhani’s first term in office, the strategy was to maintain a degree of stability and gradually adjust the rial’s value. However, the changes in the administration’s economic team have changed the decision-making dynamics. Compared with their predecessors, the new ministers of economic affairs and finance as well as industry, mining and trade, Mohammad Shariatmadari and Massoud Karbassian, respectively, are more interested in export promotion than exchange rate stability.

Experts agree that the current official rate of the national currency (about 35,000 rials to the dollar) represents an overvaluation of the rial; hence, it is evident that there would be a push to correct the value. The main driver of the exchange rate correction is the country’s export industry, which would become more competitive on international markets if the rial is valued more realistically.

Nevertheless, the various schools of thought will continue to interact to find a suitable blend of policies. Shocks such as the recent 5% devaluation may be part and parcel of a gradual devaluation of the rial and the preparation of the market for an eventual unification of the exchange rates.

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