The ongoing situation of Iran’s unstable economy, inflation, and the ruling regime’s political isolation hand in hand skyrocketed the price of the U.S. dollar to more than 600,000 rials in the past few weeks. Despite the hollow promises of regime President Ebrahim Raisi and the Central Bank, it was not possible to immediately control the increase in the price of the dollar, and the government once again realized that economic necessities cannot be changed through orders and promises.
Following the announcement of a recent political agreement between Iran and Saudi Arabia, and the possibility of normalization in relations between Riyadh and Tehran, Iran’s currency market responded with reductions in the price of the U.S. dollar. Although this political development was accompanied by the hope that Tehran is attempting to end its political isolation, financial experts believe this cannot deliver a final solution to the currency woes in Iran.
In the two weeks, the market was facing an increase in a new surge in the price of the U.S. dollar, reaching 550,000 thousand rials on March 30 and 31, and the euro was trading at 600,000 rials.
In a survey conducted at the end of the Persian year, the state-run Donyay-e-Eghtesad daily sought to forecast economic developments expected in 2023. In this survey, market experts expressed their opinions about effective components for economic conditions.
The market is losing trust in the rial
“The most important engine behind the stock market next year will be changes in the dollar exchange rate. Experts believe that next year is the rial’s depreciation will be between 30 to 60 percent. Stock market experts believe the most important factor behind Iran’s stock market’s lagging behind other markets is the lack of confidence among investors,” the survey reads.
From the first day of his administration, Raisi attempted to encourage domestic investors to purchase stocks and boost the country’s market in the absence of foreign investment. However, his claims of incorrect statistics and optimistic economic forecasts failed to fundamentally revitalize Iran’s stock market.
The fact that domestic investors in Iran, and the general public, constantly monitor the dollar exchange rate and adjust not only their transactions but also inflation and general economic conditions with the price of the dollar, are well reflected in this recent survey.
“According to capital market experts, 46 percent of respondents consider the currency exchange rate as the main factor in stock market fluctuations. Twenty-seven percent of the observers said they believe stability in macroeconomic policies, which can be another element behind the rise and fall of share prices of stock market companies,” Donyay-e-Eghtesad writes.
“The return of investors’ trust” also accounts for the remaining 27 percent, which is basically a function of the economic status quo and cannot be realized through the promises of politicians.
It is no secret to economists that the currency exchange rate fluctuations in Iran, and its ups and downs, are mostly caused by the country’s prevailing economic and political circumstances. Corruption and ineffectiveness among regime officials are the main reason behind the current situation.
Popular uprisings in Iran have made it clear that the ruling regime has no legitimacy. Foreign investment, which could boost Iran’s stock market, has been neglected in the survey, the reason being that foreign investment in Iran can face heavy and harmful consequences due to widespread protests.
Continued currency fluctuations
The dollar exchange rate, whether in an upward or downward trend, eventually has to correct its course and stand at a reasonable figure, said Hamidreza Kahedi, a financial affairs expert, in an interview with the regime’s semi-official ILNA news agency. “In the current circumstances, political breakthroughs are very important because they open the way for the currency to flow into the country. The agreement with Saudi Arabia, which leads to relations development with other Arab countries, has a positive impact, while we cannot expect a strange jump in the currency market in our status quo. However, money printing continues and with the resulting inflation, the dollar exchange rate soaring above the 600,000 rial mark will not be considered strange,” Kahedi added.
According to this expert, with the continuation of high inflation in Iran and during a possible dip, the dollar has the capacity to exceed the 600,000 rial mark. Some experts even predict an “astronomical figure of one million rials” for every dollar by the end of the Persian year (March 2024).
Determining the real price of the dollar
There are several parameters involved in the temporary drop in the price of the U.S. dollar. Siavash Gheibipour, an expert in economic and financial affairs, explains:
“The fluctuation period in terms of time has had a series of short ups and downs during the last six months. Why these fluctuations were formed in this way is divided into two parts, a part of non-economic, non-banking, and non-monetary factors, being the impact of external conditions, foreign relations, the opening of foreign relations with Saudi Arabia and China, and the release of financial resources in Iraq and the UAE. This was a process that partially reduced the psychological impact of the nosediving currency, which took place in the first half of March. What we are witnessing today, and from my analysis, is due to the beginning of the year (starting from 21 March) and the budget launch, which leads to a 30 percent increase in the budget. This budget increase results in added inflation in the economy. Those who trade in the currency market expect that the inflation caused by the budget will reduce the country’s national currency credibility and the dollar will become more expensive.”
According to this expert, the real value of the currency in Iran should be based on the value of one consumer goods basket in U.S. dollars is equivalent to its value in a third country. If there is a difference, the government has started “exploiting the currency”. In fact, the same purchasing power is the basis for measuring various currencies. However, the same amount of purchase depends on continuous and competitive production outside of the country’s borders.
Since Iran’s next fiscal budget is inflationary and there is no hope of correcting the country’s monetary and currency policies, the trend of fluctuations in the currency value will continue into this year. Changes in bank interest rates in Iran and political openings can only restrain the increase in the price of the dollar for limited periods of time.