Saturday, June 24, did not start well for Iran’s economy. The currency, the rial (IRR), plunged yet again against hard currencies including the US Dollar (USD), the Euro (EUR) and the British pound (GBP). Markets were distraught and people rushed to buy telecommunication products and accessories. Once again, tension could be felt within the business environment and the Iranian public became increasingly concerned.

By Sunday evening, the second working day of the week, the USD-IRR exchange rate reached 90,000 rials per dollar in the unofficial market, a market that President Rouhani’s administration classifies as illegitimate. The Central Bank of Iran has set the official exchange rate at 42,000 IRR per USD — half the market-based exchange rate. Merchants in possession of the necessary paperwork, official permits and political connections can access dollars at this rate to import pre-approved commodities and products. Students on official fellowships, government employees on official business, researchers and public entities can also access hard currency at the official rate. By putting this in place, Iranian officials believe they can stabilize the market by freezing the exchange rate and creating a list of items and purposes for which people need hard currency. And yet, with only 40 days to go until United States sanctions are re-instated, the currency market is in turmoil. Many people point to President Rouhani’s administration and its policies when identifying the causes of this recent anxiety.

A Market Gone Wild

In spring 2018, when Iran’s currency market moved to take into account the increased risk of doing business with Iran, the exchange rate for the Iranian rial versus the US Dollar increased to 60,000 IRR to the USD. This was unprecedented. The government blamed consumers’ increasing demand for hard currency as well as psychological reasons for this change, accusing unknown parties of smuggling and attempting to distress the economy. It immediately implemented harsh policies, reminiscent of the wartime economic policies of the 1980s. It banned any currency trade outside the banking system, promised to punish anyone with currency holdings more than 10,000 euros and shut down currency exchange offices. Iranian exporters and importers could only conduct transactions with the Central Bank of Iran. This policy has failed spectacularly.

The government had argued that providing hard currency at a low exchange rate would stop prices from increasing. However, no one used the official rate when it came to pricing final products or services. All businesses in Iran use the market-based rate to estimate their costs, some increasing their prices hourly. The policy reduced economic activities while fueling rent-seeking behavior, deterring the creation of new wealth. By using a bureaucratic process to allocate currency to business activities and not a market-based approach, the Iranian government created numerous opportunities for corruption and windfall profits. The policy instantly increased the demand for hard currency.

Pedram Soltani, a businessman and the vice president of the Iran Chamber of Commerce, Industries, Mining and Agriculture, noted the increase in requests for import permits: “The current Iranian year might end up with a two-fold increase in the hard currency allocations for imports compared to the previous year,” he said. President Rouhani’s currency policy did not tame the market, but instead made it run wild. The official in charge of implementing this policy made things worse with an insatiable appetite to take advantage of the opportunities it offered.

Huge Gaps in Exchange Rates

Iran’s currency market depends on re-distribution of hard currencies earned from oil and petrochemical exports. The Central Bank of Iran referred importers to these exporters to pay them for their hard currency in rials inside Iran in exchange for their foreign currency outside of Iran. However, when there is a price gap as large as there is between the market and official exchange rates, few exporters are willing to accept the official exchange rate. Economist and journalist Dr. Pouya Nazeran has recently written an eyewitness account of this process, highlighting the fact that export executives, often government appointees, ask importers to either deposit the difference between the official and market exchange rates in their personal accounts or to accept hard currencies sold to them at the market rate. In the second scenario, the importer deposits the foreign currency in the exporter’s business or personal account abroad. Nazeran estimates that before the recent fall in the value of the rial, an importer with an official permit would have received only 60 percent of the foreign currency he had requested. An executive in a petrochemical company can gain around $400,000 USD from a $1,000,000 transaction.

President Rouhani’s administration appears to be helpless when it comes to tackling corruption and rent-seeking activities that benefit the elite. Many consider the current administration to be an accomplice and see little difference between President Rouhani’s technocrats and Mahmoud Ahmadinejad’s populism. And no one wants to admit the policy is wrong, which also has a negative impact on the economy. But Iranian markets have taken notice of these realities. Iranian businesses and consumers have stopped expecting any reality-based policy-making. They are preparing themselves for continued plunges and falls.

An honest assessment will highlight the fact that, so far, President Rouhani’s administration has been more successful in creating rents and monopolies than creating jobs and promoting economic activities. Reducing transparency across markets’ economic activities means that these operations are increasingly relocating to the underground economy. Iranians want to protect their assets; Iranian businesses want to buy inventory and to stock up; and corrupt actors want to benefit as much as they can from the gap between the two exchange rates. The outcome is an unprecedented increase in the demand for hard currency. At the same time, the government is neither expanding tourism nor removing trade barriers. No one can promise an increase in the supply of hard currency to Iran in the near future. The rational response is to buy whatever currency can be found now. Recent events are the result of both a change in expectations and the rigidity of a skewed policy.

Ordinary Iranians are preparing themselves for another wave of inflation and rising prices, while the Iranian government tries to appear in control. In the meantime, the accumulated cost of bad policies is catching up with Iran’s economy, even if the Iranian government is not ready to accept this reality.