When analyzing economic trends, the free market exchange rate of the Iranian rial is viewed as an indicator of the general business confidence in the country. Reviewing the initial effect of President Hassan Rouhani’s election on the rate in 2013, one can feel the overall positive impact that the new government had on the business climate. Indeed, in April 2013, the rate stood at about 35,000 rials to the dollar and then rose to a peak of about 39,000 before the June 2013 elections, but fell to 29,700 in January 2014. However, the fact that the rial has lost about 10% of its value (it's now trading at about 33,000 to the dollar) since the beginning of the current Iranian year (March 21, 2014) is not a positive sign for a government that pledged to stabilize the country’s economy.
Undoubtedly, there are many plausible reasons for the exchange-rate development. The country’s continued inflationary environment, with an annual inflation of about 30%, is a key factor. Businesses and other economic stakeholders know that the exchange rate cannot remain unchanged under such conditions. Furthermore, the introduction of the second phase of subsidy reforms in April 2014 and the consequent increase in fuel prices generated additional anxiety, which always leads to hedging behavior that focuses on buying gold or hard currency. In addition, the lack of progress in the nuclear negotiations may have compelled some economic players to be concerned about the country’s future economic direction. Parallel to the above developments, the Central Bank of Iran (CBI) caused some irritation in the banking sector by introducing caps on bank interest rates for savings accounts and bonds (dubbed “participation certificates”). Experts understand that the CBI and the government are trying to contain the inflationary impact of bank interest, but for the average citizen, there is no incentive to earn about 20% on its savings in an economy where inflation is closer to 30%. Another factor connected to the previous developments was the relative decline in the Tehran Stock Exchange index, which always shifts investors to other speculative investments, including hard currency.
