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History repeats itself in Iran's currency exchange market

The Iranian rial continues to lose value against foreign currency, as exporters face high costs due to sanctions and the government continues a policy of forcing them to accept low exchange rates.
The picture illustrates United States 100-dollar bills bearing the portrait of US statesman, inventor and diplomat Benjamin Franklin next to Iran's various Rial banknotes, bearing a portrait of Iran's late founder of Islamic Republic Ayatollah Ruhollah Khomeini in Tehran on January 18, 2012. The Rial's plunge, to 18,000 to the dollar hit a record low on January 18, based on rates in black market trading that the government has tried to ban. AFP PHOTO/ATTA KENARE (Photo credit should read ATTA KENARE/AFP via

The currency exchange market in Iran is experiencing another volatility cycle with the Iranian rial (IRR), losing its value repetitively against foreign currency. The volatility cycles have become a frequent event in Iran’s economy, and no one finds them surprising. However, the government’s response to the increased ambiguity and volatility cycles remains the same. The Iranian authorities and policymakers always search for an individual or a group of individuals to blame for the unfolding crisis, since their adopted macroeconomic policies and monetary measures remain irreproachable. As the Iranian government refuses to learn from the past and the present episodes, it is doomed to repeat history. And ordinary Iranians pay the price.

The Iranian government is utterly reluctant to adopt a single currency exchange market; it has divided the markets and created a puzzling bureaucratic labyrinth when it comes to exchanging currency. Believing in the myth that if it controls hard currency resources and manipulates the currency exchange rate, it can restrain inflation. In other words, the Iranian government believes if it sets the exchange rate, it is controlling domestic prices. Consecutive administrations have adopted this approach for the past 40 years, and it has never lowered the inflation rate. As a result of this policy, the currency exchange market in Iran is a fractured multilayered singularity, including several submarkets offering ample opportunities for corruption. While the Iranian authorities are blaming exporters for the recent fall in the value of the rial, one has to point out that the currency exchange market in Iran favors imports and discourages exports.

At the time of writing this article, the exchange rate for the rial versus the US dollar stands at 230,940 IRR/USD in Tehran's free exchange market, according to The exchange rate in Herat, Afghanistan, is 247,200 IRR/USD, and in Sulaimaniyah, Iraq, it stands at 254,600 IRR/USD. These are not the only rates. There is NIMA, which is the abbreviation for Currency Exchange Unified System. Iranian exporters are required to sell their hard currency in this market, where the exchange rate stands at 184,450 IRR/USD, a decent 20% below the open market rate. Then there is SANA where the currency exchangers are required to register all of their trades and the exchange rate they have used. In SANA, the exchange rate stands at 228,149 IRR/USD. To all of these, one has to add the official exchange rate of 42,000 IRR/USD, at which the Central Bank of Iran (CBI) will sell hard currency to those who are importing necessities, including food, grain and medical supplies. One does not need an economist to highlight the opportunities for rent-seeking and corruption.

An importer will do his utmost to receive all or a portion of the hard currency he needs at the official rate, which is one-sixth of the free market exchange. Whatever he imports reaches the end user at free market prices. Thus, the importer pockets a profit of 500% just by having the right connections to buy dollars at the 42,000 IRR/USD rate. Now, even if the importer does not have the proper links, he can buy a portion or all of the currency he needs via NIMA. He pays 20% to 25% below the free market rate and benefits from a profit margin just because of the discrepancy between the free market and NIMA. However, if the currency exchange regime in Iran is designed to reward the importers for lowering the domestic prices, it punishes the exporters cruelly.

An Iranian exporter must weather sanctions, negotiate his path through different government agencies while remaining wary of any company owned by a public or military entity entering his industry. When he finally delivers his merchandise, he is at the mercy of his buyers to pay him, in a world where everyone knows of the price and the penalty of doing business with Iran. He cannot transfer the money back home legally using banking channels. Thus, he is forced to deposit his earnings abroad, bringing them back home as circumstances permit. When his hard-earned money arrives, then he is supposed to sell it via NIMA, where he receives 20% to 25% fewer rials compared to the free market. On the one hand, sanctions have increased his transaction costs significantly, and on the other hand, the Iranian government wipes off his profits by forcing him to accept a lower exchange rate.

At the same time, any Iranian exporter needs hard currency to import materials and equipment. As Iran’s banking industry is under sanctions, and Iran failed to adopt the Financial Action Task Force (FATF), the country’s banks are increasingly isolated from the world. An Iranian exporter finds it more convenient to keep the hard currency outside Iran in the international banking system to remain in the market. One needs to remember that the FATF blacklisted Iran in February for a second time after Iran’s Expediency Council refused to accept the legislation passed by the majority of the Majlis, Iran's parliament, in support of the FATF. An Iranian exporter who decides to bring home all of his revenues might find himself in violation of international law, which means the end of his business activities.

Ignoring all of the challenges Iranian exporters face the Iranian authorities from the president to the CBI governor blame the exporters. In a recent panel broadcast by the Islamic Republic of Iran Broadcasting, Samad Karimi, head of the CBI Office of Exports, charged that Iranian exporters are refusing to bring back 27.5 billion euros ($31.4 billion) worth of revenues. According to him, from the 19,176 officially registered exporters, only 16,435 exporters have returned their earnings, a total of 5.7 billion euros ($6.5 billion). He told his audience that 250 exporters have the highest share with 6.8 billion euros ($7.8 billion). The CBI has requested assistance in prosecuting these individuals. However, one wonders why the CBI is not exploring the incentives behind such conduct. In a market where the euro is exchanged at 254,020 IRR/EUR, why must an exporter sell it at 197,566 IRR/EUR, losing 20%? No wonder that some exporters are purchasing hard currency on the streets of Tehran from the free market to fulfill their obligations to the CBI, thus increasing the demand for the limited resources available inside Iran. The CBI pressure to increase the supply of hard currency has backfired by increasing the demand for it.

Many exporters have decided to use their reserves for imports since they have found it more rewarding and can benefit from a higher exchange rate. The CBI estimates that from the $21 billion exporters deposited from April 2019 to February 2020, $7 billion was in the form of imported commodities. An Iranian economist told Al-Monitor on condition of anonymity, “Despite the volatile currency market, more car dealerships are opening up in Tehran to sell imported cars.” A BMW X3 2.0i sells for 22,500,000,000 rials in Tehran, its average price in neighboring United Arab Emirates (UAE) is $53,000. It means a vehicle purchased in the UAE arriving in Tehran can fetch a price converted at an exchange rate of 424,530 IRR/USD. Few will decline to participate in such a lucrative business.

If the Iranian authorities ease the pressure on exporters, the exchange market will calm down. However, instead of addressing discrepancies and unifying different markets, the Iranian government is pressing on with prosecuting Iranian exporters. The outcome is predictable. In its efforts to fight off inflation and to maintain normalcy in the presence of sanctions, the Iranian government is sacrificing private business engages in exporting Iranian commodities and goods. For the time being, the policy has only intensified the crisis while threatening to remove Iranian private businesses from the export arena permanently.

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