To Fight the Rial’s Plunge, Tehran Resorts to Tactics that Failed Before

The Iranian rial fell to its lowest value in the country’s history this week, trading at 449,000 to the dollar in the unregulated market. This marks a setback for Iran’s new central bank chief, Mohammad Reza Farzin, who took the helm last month and briefly managed to push the exchange rate down to 397,600 to the dollar.

Iranian President Ebrahim Raisi sacked Farzin’s predecessor in late December after the rial slipped to 440,000 per dollar, a 21 percent drop since the beginning of that month. Farzin took office on December 29 and immediately turned to the standard tactics Iranian central bankers employ to influence the foreign exchange market: He increased the supply of dollars and tried to suppress demand in the unregulated corners of the market.

On the second day of Farzin’s tenure, the price of the dollar dropped to 397,600 rials, but that victory was short-lived. The upward pressure caused by macroeconomic factors and political uncertainty continued. On January 22, the price of a dollar in the unregulated market hit 449,000 rials, exceeding the price that led to Farzin’s predecessor’s ouster. In response, the central bank chief went on television and said he did not believe the 450,000 rial-to-dollar rate was real. He added, “they make up numbers on the internet and then claim it is the free market rate.” Farzin vowed the central bank would enter the unregulated market to stabilize the price.

Iran’s foreign market has a unique and complicated structure that consists of several markets usually separated from each other by the full force of law and regulation. The market has three key exchange rates: The first is the central bank rate, an artificially low rate currently set to 42,000 rials, which the central bank allocates for purchasing a limited number of imported goods. The second rate is the price of the rial in unregulated markets. Prior to the four-year slide following Washington’s withdrawal from the nuclear deal with Iran in May 2018, the rial traded around 60,000 to the dollar.

The third is the rate for the NIMA platform, which allows exporters and importers to exchange currency. It is currently set to 285,000 rials to the dollar. The NIMA platform is effectively a centralized hawala network that enables Tehran to fund its imports with export revenue without the money touching Iran’s sanctioned financial network. Using NIMA is mandatory for exporters; it has become an important gateway for bypassing sanctions as most of Iran’s non-oil exports are sanctioned goods and Iran’s access to the global financial network is limited.

The NIMA rate is the most important in Iran’s fractured foreign exchange system since the platform funds the majority of exports. Farzin vowed to keep the NIMA rate at 285,000, which he has sustained through heavy central bank intervention. However, the gap between the NIMA rate and its unregulated counterpart has been growing significantly. This disparity is likely unsustainable. When the gap becomes too large, foreign currency holders have greater incentive to circumvent legal and regulatory firewalls to sell their assets in markets that offer higher prices.

Farzin is planning to create yet another foreign exchange platform, called NAKHODA — Persian for ship’s captain — whose purpose is to tame the market rate by bringing a portion of transactions in the unregulated markets under the central bank’s control. Most likely, that approach will only add to the system’s corruption and lack of transparency. Without a return to the nuclear deal and the sanctions relief it would provide for Tehran, any gains for the rial will be short-lived. Furthermore, amid an intense wave of political unrest, a wall of sanctions, persistent high inflation, and a lost decade of economic growth, no captain can steer Iran’s economy in the absence of major structural changes, both political and economic.

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.