Iranian exporters to suffer impact of frozen exchange rate

Al-Monitor Pro Members

Dr. Bijan Khajehpour

Managing Partner, Eurasian Nexus Partners, Vienna, Austria

Jan. 9, 2023

As long as the underlying political factors are not addressed, Iran’s national currency will lose value and put additional pressure on the Iranian economy and society. The latest decision by the Central Bank of Iran (CBI) to freeze the exchange rate for one year, won’t provide the economy with the level of certainty and predictability that is required for meaningful economic development.

• Over the past few weeks, the value of the Iranian rial has crashed on the so-called free market. However, on the more significant parallel Nima market the parity has been relatively stable.
• Iran has had a multi-tiered exchange rate system for the past few decades. The current status is a continuation of what emerged in the aftermath of the US withdrawal from the nuclear deal, also known as the Joint Comprehensive Plan of Action (JCPOA), in May 2018.
• At that juncture, authorities attempted to unify the previously two-tiered rate and introduced a unified parity of 42,000 rials to the greenback. However, after a few months, the business community was faced with a three-tiered system: a) Subsidized exchange rate of 42,000 rials – a rate only used for the import of essential goods such as food and medicine; b) The Nima rate, a hard currency exchange platform for importers and exporters managed by the CBI; and c) The free market operated by official and unofficial foreign exchange bureaus that supply hard currency to segments of business and society that were not covered by the first two markets.
• Between 2018 and April 2022, when the subsidized rate was discontinued, the existence of a massive differential between the subsidized rate and the free market parity had become a major platform for corrupt dealings in the economy. Though the discontinuation of the lower rate limited the scope for corruption, it simultaneously increased the inflationary pressures on the economy.
• Since April 2022, the two-tiered system is back; the Nima rate — which according to officials provides 95% of the economy’s needs — and the Free Market rate. On Jan. 8, the two rates stood at 285,000 rials and 407,600 rials to the US dollar, respectively.
• There are a number of factors contributing to the currency devaluation, including the government’s high budget deficit that is expected to be as high as 4,000 trillion rials (more than $14 billion at the current Nima parity), high inflation, continuation of external sanctions, among others.
• Psychological and social factors are also significant. Since the beginning of the social protests in Iran in mid-September, Iran’s national currency has lost 27% of its value due to socio-political uncertainties and a growing push for migration.
• Furthermore, the government’s failure to present two important economic bills, including the draft five-year plan and the state budget for the year starting on March 21, 2023, has also agitated the business community increasing concerns about overall macroeconomic development.
• Though the new CBI governor, Mohammad Reza Farzin, has committed to freeze the Nima rate at 285,000 rials for at least one year, there are far too many uncertainties to anticipate a positive outlook.