Iran sets single foreign exchange rate to rescue currency By Amir Paivar

BBC Persian business reporter Published duration 10 April 2018

image copyright Getty Images image caption Iran relies on money from its oil exports to cover virtually all its expenses

Iran's currency, the rial, lost some 20% against the US dollar in two weeks as Iranians rushed to hedge against depreciation of their assets. Some fear an imminent collapse of the nuclear deal and return of economic sanctions.

"We are sitting idle watching numbers go up. You cannot do business when you start the day with one rate and end with another," Ismail Kazemi, an Iranian coffee importer, said in a phone call from his office in north Tehran.

"Best is to do nothing until the dust settles," he added.

In the foreign exchange market it has been more of a sandstorm for the past few weeks. The Iranian currency, the rial, lost 8% against the dollar in one day this week.

On Monday night the government stepped in, removing the discrepancy between the exchange rate used by traders - 60,000 rials to the dollar - and the official rate - previously 37,000.

The new single rate has been set at 42,000 rials to the dollar.

image copyright Getty Images image caption The old official rate was costly to the government

"We do not recognise any other rate," Iran's first Vice-President Eshaq Jahangiri said on a late television broadcast.

"Anyone trading at any other rate will be considered a smuggler," he added.

The old official rate was costly to the government, and therefore limited to imports of selected goods that were deemed necessary.

Just this week the government said it could no longer offer it to students studying abroad, and they now have to buy foreign currency from the open market to pay for their tuition.

An old dream

With some $50bn (€40bn; £35bn) in oil exports, Iran's government is the main supplier of hard currency to the economy. But there is also an open market of licensed exchange offices and unlicensed street traders.

When it comes to exchange rate, the two have seldom sung from the same hymn sheet.

Iran uses its petro-dollars for virtually all its expenses, from import of basic staples such as wheat to military adventures in Syria.

But there is a cap on how much of its hard currency it can allocate to expenditure considered "luxury", such as Iranians travelling to Thailand for fun, or those who import cosmetics.

This is where the open market comes in - always at a higher price. Unifying the two rates is a 40-year-old dream. But it is not the first time that Iran has tried to force a single rate.

In January 2012, Iran's central bank set the exchange rate of the US dollar at 12,260 rials while the value the rial on the open market was about half that. The so-called unified rate lasted only a few months.

Iran was then accused of pursuing a nuclear weapons programme and the economy was crumbling under international sanctions that limited its oil exports.

"When you set a government-enforced single rate, you have to be able to support it," says an Iranian economist who works with the government and wishes remain anonymous.

"Iran's government did not have infinite coffers of hard currency then and nor does it have now."

Looming fear of sanctions

Iran's trade balance is actually healthy. Besides oil, it also has some $40bn of so-called non-oil exports. The country imports $50bn worth of goods and services every year.

The main problem is bringing the export proceeds back to Iran.

Although most international sanctions were lifted in 2016 following the nuclear deal, there is still no major international bank that will work with Iran.

Iran's tensions with Israel and Saudi Arabia are increasing over Syria and Yemen. And in Washington, there is a president who thinks that the Iran nuclear deal has "disastrous faults".

President Donald Trump has asked Europeans to either fix the deal or see the US leave the accord next month. If the deal collapses, unilateral US sanctions against Iran's energy and banking sectors could return.

image copyright Getty Images image caption The Iranian government remains cautious in spending its hard currency

That is why Iranians have a hunger for hard currency. There are even reports of capital flight with some Iranians buying assets in neighbouring countries, fearing a military confrontation with Saudi Arabia, Israel or the US.

And that is why the government is cautious in spending its money.

It is not clear if the Iranian government will gamble by opening the floodgates of its reserves at the new so-called unified rate, or if it will again be limited to select groups of buyers like students and businesspeople.

"At the end of the day, it's about who you know," Mr Kazemi, the Iranian coffee importer says.

"We know some people in the right places."