Forbes, April 11, 2018 - Iran is experiencing a financial crisis as its currency, the Iranian rial, has experienced unprecedented devaluation over the past few months. Just in the last two weeks the value against the dollar dropped by 10,000 Iranian rials. The exchange rate is now about 60,000 rials to the dollar.
Iran is now attempting to set an official exchange rate of 42,000 rials to the dollar, which does not correspond to what the market demands. In attempt to defeat the market, the government has promised severe punishments for anyone found exchanging rials at another rate. Many Iranians are used to exchanging rials at a rate other government’s official (artificial) one. In fact, over the past decade the official (artificial) exchange rate and the one set by the market has differed by about 15%.
According to a BBC analysis, the root cause of the massive devaluation is not a trade imbalance. In addition to oil exports, Iran exports approximately $40 billion of goods. It imports about $50 billion. The problem is that Iran is having trouble bringing this money back into Iran. Even though international sanctions were lifted after the signing of the nuclear deal, Iran has not been able to attract any major international banks to the country.
The real victims are Iranian businesses that rely on importing or exporting goods. Many of these businesses were not able to get currency from the government and relied on unofficial exchanges to conduct business. Now that the government is cracking down on these in an attempt to set a single exchange rate, these businesses will find it increasingly difficult to operate.
Iranians walk past a currency exchange shop in the capital Tehran on April 10, 2018. Iran took the drastic step of fixing the rate of its currency against the dollar in a bid to arrest a slide that has seen it fall by a third in six months.
Iran may be cautiously trying to increase its oil exports to increase the government’s supply of dollars. According to S&P Global SPGI -0.87% Platts, Iran’s oil production inched up to 3.83 million barrels per day in February from 3.80 million barrels per day in November. However, the Iranian oil industry seems to be unable to increase production much beyond that. Even though its OPEC allocation is technically 3.797 million barrels per day, it is permitted to produce up to 4 million barrels per day as long as its 12 month production average remains at 3.797 million barrels per day. Iran has been known to cheat on its OPEC quotas in the past, so it would be expected for Iran to increase oil production and exports to help relieve its currency—if only the Iranian oil industry was capable of producing more.
This currency crisis is another step in the collapse of the Iranian economy, which was expected to rebound after the signing of the nuclear agreement. Difficult economic conditions brought protestors to the streets in a number of Iranian cities earlier this year, however those protests were quelled by the government. It is important to continue watching the economic situation in Iran, because historically economic issues have typically led to the most significant political unrests in that country.
Ellen R. Wald, Ph.D. is a historian & consultant on geopolitics & energy. She is a Non-Resident Scholar at the Arabia Foundation. Her book, Saudi, Inc., will be published in 2018.
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