The devaluation of the Iranian rial first gained serious steam back in April, partly due to fears of returning US sanctions. As such, the administration of President Hassan Rouhani on April 10 implemented what it called a rate unification policy in order to prevent further depreciation of the national currency. Market fears were found to be justified when US President Donald Trump on May 8 decided to withdraw from the Joint Comprehensive Plan of Action. At the time, this author argued that the rate unification was a last resort that could prove to be a step in the right direction, if implemented correctly. Fast forward to the present, and the rate unification is full of holes as a result of the administration’s misguided approach.

Indeed, there was never truly a unification of Iran’s dual exchange-rate regime. The government unilaterally set the exchange rate of the US dollar at 42,000 rials and simply ignored the open market rate, which valued the dollar almost 50% higher at the time of the rate unification. By branding any exchange of foreign currency outside the unified rate as tantamount to “smuggling,” the government only transformed the open market into a black market. The latter has since increasingly become a breeding ground for speculative activities. What is more, the rate of the greenback on the black market has jumped from 60,000 at the time of the rate unification to 79,000 rials June 26.

Meanwhile, the government has in effect recognized two rates in addition to its "unified" rate of 42,000 rials. It has been allocating subsidized currencies to essential goods at 38,000 rials — the official rate set by the Central Bank of Iran prior to the announcement of the unified rate of 42,000 rials back in April. More importantly, the government made a crucial mistake when it promised that the unified rate would answer for all currency needs, from essential goods to luxury items. The Rouhani administration did this on the back of repeated claims that the country has a surplus of hard currency and therefore faces no challenge in providing for all the needs of economic sectors in addition to popular demand. But there was simply no need for such a declaration — especially since many pundits, private sector actors and parliamentarians had warned against it — except perhaps to save face and present a strong front in the face of pressure.

Indeed, it quickly became obvious that even with a trade surplus, the authorities cannot possibly meet demand for hard currency at the unified rate. As such, the recent turmoil on the foreign currency market has brought with it several important changes to government policy, including a belated recognition of the black market.