Iran Snap Analysis: The Currency Falls --- What Does It Mean?

The Iranian currency, the rial, has fallen almost 10% vs. the US dollar in five days. The rate now stands on the open market at 15300:1.

Those numbers are only the beginning of the story. The gap between the official rate of exchange, which is just below 11000:1, and the free-market rate is now more than 40%. That in turn feeds the fall of the rial. People will line up outside banks --- Tabnak wrote this week of the degrading sight of Iranians sleeping in front of them and waiting for the doors to open --- and, if they can get the dollars, immediately re-sell them at "free" rates. Alternatively, people will buy gold coins --- some will again take advantage of gaps in rates to make a quick profit by trading them on the open market, others will store them as a hedge against the economic crisis.

In September, the Central Bank had set a "red line" of 13000:1, which in itself was a historic low, for the rial. It put dollars into the market in an attempt to hold that rate. The effort failed. By last week, the head of the Central Bank, Mahmoud Bahmani, was reduced to pleading that those with influence did not realise the seriousness of the situation: sanctions were proving more dangerous than "physical war".

The recent developments indicate that the Central Bank will not or cannot intervene. Is that because Iran's foreign exchange reserves are shriking to risky levels? Given the lack of reliable information offered by the regime, that cannot be established.

The shift in the exchange rate may not be damaging at some levels. For example, a weak rial and strong US dollar can help Iranian exporters, if they are not hindered by the sanctions regime. On the surface, they do not affect what Iranians pay for domestically-produced goods. However, they do affect the cost of imports, which can hurt Iranian producers. If they cover those costs by raising their prices....

The falling rial is the sharpest image of a lack of confidence in the Iranian system. Of course, that is not surprising in the international arena, where the US has been seeing exactly that outcome through the sanctions regime. 

Far more important, however, is whether that lack of confidence is spreading at home. On Tuesday, the regime showed the jitters when it initially declared, then withdrew, the announcement that it was suspending trade links with the United Arab Emirates. Given that the UAE is Tehran's second-largest partner, notably as a transit point for the movement of goods and finance into and out of Iran, the episode smacked of desparation amongst the Islamic Republic's officials.

And if those at the highest levels of the establishment are feeling the pressure, then it might be assumed that those lower down --- with less power and fewer resources, facing subsidy cuts, rising prices, and a high rate of unemployment --- may be feeling it even more. Their eroding coincidence would feed the cycle of economic distress.

All the posturing statements of the President --- on Tuesday, he declared that many countries had asked Tehran for economic advice --- and the attempts of State news agency IRNA to hide the news cannot offer a cure. Instead, the Islamic Republic will move to another question: what will be the political effect of the falling currency and confidence? Passive acceptance by the public or a sign of public anger? And if the latter, in what form and directed at whom?