The Iranian business community is facing an undecided Central Bank of Iran (CBI) with regard to its foreign exchange policy. The main reason for its hesitation may lie in the opaque interests connected to a multi-tiered exchange rate system.

For years, the free-market value of the Iranian rial has reflected the overall sentiment of the country’s business community as well as the current supply-demand situation. The Ahmadinejad administration kept the free-market rate stable, generating sufficient supply by injecting petrodollars into the market. However, political tensions alongside sanctions and inappropriate economic policies led to the collapse of the rial on the free market, and the rate grew to as high as 40,000 rials to the dollar in 2012.

The situation relaxed somewhat when the government introduced the so-called "currency room" for importers and exporters and by early 2013, the rate of the "currency room" (25,000 rials to the dollar) became the de facto official rate, with the free-market rate hovering around 35,000 rials. However, ever since the election of President Hassan Rouhani, the free-market rate has followed a downward trend. (See graph below.) The appreciation of the rial over the past week was clearly a consequence of the positive news coming out of New York and the potential for a positive turn in the nuclear negotiations and the outlook for sanctions relief.

However, on Sept. 24, Iran’s business community witnessed a very peculiar intervention by the governor of the CBI, Valiollah Seif. While the free-market rate of the Iranian rial was rapidly following a downward trend, Seif commented that the rate had "reached its minimum," and that "a further fall would not be logical.” Incidentally, the emerging situation, i.e. the free-market rate falling to approach 28,000 rials to the dollar, which meant that the differential to the official exchange rate was being closed, should have been ideal for the Central Bank. Market insiders believed that the rate could have fallen to 26,000 if the trend had not been interrupted. However, the CBI governor’s comments pushed the rate up again, as traders and businesses rushed to buy more hard currency in anticipation of corrective measures by the CBI.