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What's really driving currency depreciation in Iran?

Rather than an indicator of a poor economy, the devaluation of the Iranian currency is the result of investment behavior, and what we are witnessing now looks more like a bubble.

The Iranian rial has lost about a third of its value over the last year, burnishing claims that the economy is stumbling. But while the devaluation is concerning, it does not point directly to real economic weakness. As such, it looks less like a hedge to protect assets and more like a bubble in which Iranians are investing enthusiastically.

In his recent piece for Al-Monitor, Iranian business consultant Bijan Khajehpour looked at six drivers of the devaluation: first there are issues of management and policy at the Central Bank of Iran such as the longstanding differential between the official and free market exchange rates, the reported challenges that CBI is facing in repatriating foreign currency and the central bank’s troubled interventions in the currency market as it tried to arrest the loss in the rial’s value. These might be considered “supply-side” drivers of the devaluation as they pertain to the availability of hard currency in the market. On what we can call the “demand-side,” there is inflationary pressure, overall demand for return on investment and the psychological state of the market. To better understand these factors, one can look at the data from the past Iranian year, which ended March 20.

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