Iran Analysis: Has the Regime Solved the Currency Crisis?

On Saturday, after an effective four-day break in trade in foreign exchange, the regime put out its solution for the currency crisis. Through the Central Bank's injection of dollars, the "trade room" set up last week for importers, and a public-relations campaign announcing a new "open-market" rate, officials would point to a Rial which had not only checked its historic dive but which had suddenly strengthened. At the same time, the Tehran Bazaar, effectively closed since Wednesday, would return to business as normal.

The morning began with the triumphant declarations that merchants and customers were in the Bazaar and that the Rial, suspended at 35500:1 vs. the US dollar on Tuesday afternoon, had soared 30% to between 26000:1 and 29000:1. 

This assurance was soon muddled, however. Reports came in that some people were indeed able to get the US dollar at 28500:1, but only by standing in long queues at certain exchange offices and then only to a limit of $5000. For Iranians facing large obligations abroad, such as business debts or tuition fees, that amount was far from sufficient. The rate, an EA correspondent noted, was "only suitable for those trying to make a quick buck". Those people who could not get the preferential rate had to return to the reality of the open market, paying up to 50000:1 for the dollars that they needed.

Some in the system played along with the regime's economic game, but others did not. Members of Parliament continued to criticise the handling of the situation by the Government and the Central Bank and announced that the Minister of Intelligence would be summoned to answer questions about the "disruption". The leading currency website Mazanex, in early afternoon, announced that it was not possible to give the "real" rate on the domestic market.

So what is the reality?

The regime has not restored the open market with a freely-moving rate. It has introduced a new "fixed rate" to the system. Indeed, it has now put in three fixed rates, two of them in somewhat haphazard fashion in the last two weeks.

There was already the "official" rate of 12260 Rials to the US dollar, but this had been suspended for everyone --- including importers --- except the most privileged customers in August. It has been restored for importers of the most important basic goods, in Grades 1 and 2, but has not been extended to others.

Instead, the Central Bank introduced its "trade room" where the Rial is about 26000:1 vs. the dollar. That rate is available to importers of Grades 3-6 of the 10 classifications of goods. Officials also said this weekend that students studying abroad --- most of whom had previously been able to get the official rate --- could now use the trade room.

The third rate is the one suddenly put in place yesterday. Some Iranians can now get to the US dollar at 28500:1, provided they have the connections or the persistence to get to the head of the queue.

But "some" is far from "all". If the Central Bank is going to steady the market, it has to provide enough foreign currency to enough exchanges to meet most demands. Otherwise, the true "open market" --- both in legal exchanges who choose to operate and in illegal street trade --- will continue with the Rial at a much weaker level.

To pull off this solution, the Central Bank has to have enough foreign reserves to keep injecting the dollars, pounds, and Euros.

And that is where we get to the unclear nub of the situation. Almost no one outside the inner workings of the regime knows how much foreign reserves are on hand. A figure of more than $100 billion circulated up to 2010, but then the political uncertainty and economic squeezes brought questions. It was likely that the reserves had dropped, but by how much? 20%? 30%? 50%?

The regime's gamble is that enough Iranians will buy into the perception that the Rial has strengthened before a critical point is reached with the reserves. Then the market can be funded with Iranians' own money, rather than that of a Government which is facing a halving of its revenues from oil exports.

That is not a market solution, but a "confidence" solution. It relies on the magic of the new rate, supported by the coercion of warnings not to put out alternative information that may be closer to the truth and of possible detention for traders who break the rules.