In Iran, Rising Demand and Falling Supply of Hard Currency Drive Rial to Record Lows

The value of Iran’s rial hit a historic low last week, likely spelling further discontent and civil unrest in the coming months. The trend of massive depreciation since nationwide protests began last September will put upward pressure on the country’s inflation rate, which is already at an annual average of 47.7 percent.

Since the Islamic Revolution of 1979, Iran’s currency market has suffered from serious structural problems. Unable to prevent the dollar’s value in unregulated markets from exceeding the official exchange rate — and scared of giving control of exchange rates to the market — the clerical regime created a maze of segmented markets for different players and tried hard to keep them separate via state coercion. This created multiple rates along with inefficiencies, corruption, and confusion.

This week, the rial fell as low as 601,500 to the dollar in unregulated markets, beating records of 575,000 and 545,000 set just days earlier. The price of the dollar is now 12 times what it was in March 2018 and more than 5,000 times what it was in 1978.

A dwindling supply of hard currency amid rising demands has contributed to the tightening of a noose around the rial’s neck. Tough U.S. sanctions levied against Tehran in 2018 limited the regime’s access to hard currency to well below the country’s needs. Despite the Biden administration not fully enforcing these sanctions, they have taken a toll.

Meanwhile, the West’s economic war against Russia in response to Moscow’s invasion of Ukraine has forced Iran to compete with Russia over customers — especially in Asia — willing to buy sanctioned oil and petrochemical products. With oil prices sliding, a price war between Tehran and Moscow to sell their oil means less revenue for the clerical regime.

This, in addition to U.S. pressure on Iraq to crack down on the illicit transfer of dollars to Iran, has created a negative supply shock and left Iran’s economy lacking hard currency. However, increased demand for dollars is what seems to be driving the rial down to the latest lows.

Years of double-digit inflation have led ordinary Iranians, as well as insiders, to buy foreign currency and gold as a hedge against the rial’s depreciation. The demand has increased in recent months as more Iranians anticipate political instability following the reemergence of the revolutionary movement in September. Fears have only grown as the prospects of an economic bailout from a renegotiated nuclear deal fade and the chance of military confrontation increases.

Iran’s new central bank head, Mohammad Reza Farzin — who replaced a predecessor unable to control inflation — has been unsuccessful in his efforts to suppress the demand for foreign currency. Farzin’s policy changes, such as consolidating foreign currency trading in a newly formed platform and banning any outside transactions, have only led to more confusion and chaos.

The clerical regime faces a dire situation as it urgently needs to suppress demand and increase the supply of hard currency. Those who want to see the theocracy’s collapse should not assist Tehran in trying to resolve the supply and demand crises it is facing.

On the supply side, the United States and its allies should limit Tehran’s export revenue and access to foreign currency. That includes pressuring countries such as China, the United Arab Emirates, Iraq, Turkey, and India not to bypass U.S. sanctions.

On the demand side, it is important to signal to the Iranian people that the nuclear deal is dead, the regime has no future, and that the West is looking forward to the day after. This maximum pressure on the regime should be paired with maximum support for the Iranian people — a policy that could perhaps yield results fairly quickly.

Saeed Ghasseminejad is a senior advisor on Iran and financial economics at the Foundation for Defense of Democracies (FDD), where he contributes to FDD’s Iran Program and Center on Economic and Financial Power (CEFP). Follow Saeed on Twitter @SGhasseminejad. FDD is a Washington, DC-based, non-partisan research institute focusing on national security and foreign policy.