Several Factors Behind Record Drop in Iranian Rial, Analysts Say
Sanctions, decline in oil exports among reasons for historic devaluation
The Iranian rial plummeted Monday against the US dollar to the currency’s lowest value ever.
Money exchange shops in Tehran were briefly trading at a rate of 200,000 rials for a greenback, according to wire reports.
Abdolnaser Hemmati, the head of the Central Bank of Iran, reportedly attributed the decline to the COVID-19 pandemic and a June 19 resolution by the International Atomic Energy Agency (IAEA) Board of Governors calling for the Islamic Republic to stop stonewalling access to two suspected former nuclear sites.
Iran has struggled to contain the coronavirus since the first cases were confirmed in Qom on February 19. As of Tuesday, the number of cases in Iran stood at 209,970 with 9,863 deaths and 169,160 recoveries.
However, analysts say that while the coronavirus outbreak is a contributing factor to the country’s current monetary devaluation, there are several other causes compounding Iran’s fiscal issues.
“The weakening of the Iranian currency is linked to the US sanctions pressure and likely to the reduction in oil exports and other factors,” Seth Frantzman, executive director of the Middle East Center for Reporting and Analysis, told The Media Line. “It is part of a regional weakening also affecting Syria and Lebanon, which is also linked to US pressure on the Syrian regime through the Caesar Act. ”
The Caesar Syria Civilian Protection Act was passed into law as part of the National Defense Authorization Act, imposing sanctions starting June 17 against the Assad regime for war crimes against the Syrian population.
On May 8, 2018, US President Donald Trump announced that the United States was withdrawing from the Iran nuclear deal. On November 5, 2018, the Trump Administration reinstated all US sanctions removed by the Iran nuclear deal.
“The main answer is not very sexy: Iran is running inflation at over 30% a year. US inflation is at most 3%. Other things being equal, Iran’s currency should drop in value by 27% a year relative to the US dollar. Except other things are not equal: Iran has experienced a huge foreign exchange shock from the dramatic drop in price and volume of its largest export, namely, oil. So the rial should drop even more,” Patrick Clawson, Morningstar senior fellow and director of research at the Washington Institute for Near East Policy, told The Media Line.
Adding to the annual inflation, Iran is enduring a multiyear recession, a situation described by economists as stagflation.
Saeed Ghasseminejad, senior Iran and financial economics advisor at the Washington-based Foundation for Defense of Democracies, said that the foreign exchange market is going through a correction. Market fundamentals are taking over despite Tehran previously being able to curb rial depreciation by increasing supply and depressing demand.
Ghasseminejad also said that the price movement is a sign of how sanctions have reduced Iran’s access to its diminishing currency reserve, estimated at more than $70 billion.
Iran’s oil exports have also dried up with a record low average of 70,000 barrels per day.
“Oil export has been Tehran’s primary source of hard currency inflow. It is gone. The latest data show that the repatriation of currency generated by non-oil export has also significantly dropped over the last few months. Consequently, hard currency is less available now. So there is a supply-side problem,” Ghasseminejad told The Media Line.
Oil export has been Tehran’s primary source of hard currency inflow. It is gone. The latest data show that the repatriation of currency generated by non-oil export has also significantly dropped over the last few months.
Other factors, according to Ghasseminejad, include a potential uptick in demand for hard currency from institutional investors, making it harder to suppress demand.
The Islamist regime is also facing a significant budget deficit that the coronavirus outbreak has exacerbated.
“One of the ways Tehran fills the gap is by allowing the dollar price to increase as the Central Bank in Iran is the largest supplier of hard currency,” Ghasseminejad said. “A higher dollar price means the government can get more rials for each dollar the Central Bank sells.”