TEHRAN — Some 200 people wait impatiently in the morning sun on the pavement outside the cluster of exchange shops that line the southside of Ferdowsi Square, the center of Tehran’s currency exchange trade. The shops remain closed 90 minutes after opening time, but the traders remain at their desks using all their efforts to ignore the vain attempts of the people outside to get their attention.
Market volatility, compounded by a shutdown of currency listing websites, has made it too risky to trade today.
“Please, brother, let me in for one moment,” an elderly woman in a chador shouts though the window, removing two large stacks of 50,000 yellow rial bank notes from her handbag and pressing them against the glass security door. “Be kind and may your mother go to heaven!”
Each of her yellow notes lost 15% of their value recently; the value of the rial to the dollar has dropped by well over 60% since December, from about 13,000 rials to the dollar to approximately 37,500 rials to the dollar on the street this past week, other sources in Tehran note.
A half-mile south of Ferdowsi, a larger and more restless crowd has formed around the entrance to a passageway on the Manoochehri road. Older men sit on parked motorbikes watching younger men clap together bundles of brand new 500-euro and $100 notes above their head. They lean against the walls, yelling out prices to the crowd which is barging its way through the narrow passage. Their prices are heavily inflated on the already soaring market rate of foreign currency, but business is thick and fast.
A man selling fresh walnuts out of a large glass vat of water to the passing panic trade shakes his head ruefully at the scene. “Our donkey president has done this. In Iran we have never had good management,” he explains.
A narrow corridor leads from the street to an open-air courtyard where the real action is taking place. A half-dozen men standing on a raised platform clutching small calculators and large stacks of cash take orders from the public, briskly relieving them of their increasingly worthless savings.
At the beginning of 2012, Iran reacted to the currency crash by setting an official foreign exchange rate of 12,260 rials per dollar, which it offers to selected importers of prioritized goods like food and medicine. But in a political system beset by patronage and nepotism, Iran’s cheap, official-rate petrodollars end up in the hands of the well-connected, who take advantage of mouth-watering opportunities to make money though arbitrage, essentially at the public’s expense.
“The poor live on subsidies and the rich with friends in government make millions on their cheap dollars,” says Sara, a middle-aged woman with her husband, her long red fingernails clasping a wad of pink 100,000-rial bills bearing Khomeini’s face. “But we suffer the most. We have a daughter studying in Paris. It has been very difficult to send her money because banks do not do business with Iran anymore, but now even if we could it would not be worth anything.”
Many theories float around about the cause of last week’s crash. Some speculate that President Mahmoud Ahmadinejad’s political enemies want to cause him problems, but as one observer in Tehran put it, “There are enough problems to go around already without politicians needing to manufacture them.” Other theories blame an ill-conceived government attempt two weeks ago to set up an auction for licensed importers and exporters to trade currencies; the volume of transactions quickly jumped 20-fold and diverted cash away from the black market.
Whatever the causes, the consequences are painfully clear. Panic buying further erodes the value of the rial and furthermore, it floods the Iranian economy with cheap rials, adding to Iran’s already cripplingly high inflation.
Though exchange rates deprive Iran’s middle class of their savings, the biggest choke on Iranians is inflation, officially listed as 22% but significantly higher in reality. A perfect storm of Ahmadinejad’s subsidy cuts and the unprecedented flooding of the economy with its massive oil revenues for populist political purposes, have put even the most basic of staples out of the reach of many Iranians. Prices of chicken, lamb and the diverse array of imported foods, which have become a mainstay for Iran’s markets over the past 15 years, have more than doubled since 2011.
Iran is estimated to have earned 47% — or $500 billion — of its total oil income in the past 103 years since Ahmadinejad took office in 2005. It has low debt and one of the most diversified economies in the Middle East. On Tuesday, Mohammad Reza Bahonar, the deputy speaker of Iranian parliament said: "The government has no lack of currency and can inject it into the market for a long amount of time.”
But Iran’s commercial class has little faith in this sanguine picture. As far as they are concerned the government supply of affordable dollars does not meet the demand, implying that the wells of foreign reserves are simply not deep enough. The middle classes hold near-universal contempt for their government, accusing them of manipulating the economic chaos for personal financial gain. The poor remain buoyed by government subsidy but eye the growing chasm between Iran’s rich and poor with a great deal of distaste. Gaudy over-sized imported cars, until recent years largely absent from Iran since the time of the Shah, are a barometer of the exploding income inequality in modern day Iran.
Like with most crises Iran has faced, the government and the people will muddle through for now. The isolated protests following the crash were small and most of the value lost on Tuesday was recovered on Thursday and Friday as the Western week’s currency trading reached its close. But with upcoming US and Iranian elections and nuclear talks, the long-term future of Iran’s faltering economy will depend largely on things out of its control.
David Jones (a pseudonym) writes for publications including The Economist, the Times, the Tehran Bureau and the Sunday Times.
[Editor’s note: Iran's 50,000-rial note is yellow. An earlier version of this article, describing it as pink, meant to refer to the toman note. Also, the value of the rial to the dollar has dropped by over 60% since December. The piece originally overstated the percentage drop.]