Iran Snap Analysis: The Currency Crisis

Iran's currency has been unstable for more than a year, but this weekend brought a possible renewal of "crisis". Sliding steadily throughout the summer, the Rial risked free fall on the open market this weekend. It plunged from 21800:1 to 24450:1 vs. the US dollar, a fall of about 12% in value. The currency is now about half as strong as its "official" level of 12260:1.

While there is an argument in theory for the devaluation of the Rial, given that it has been propped up for years to maintain cheaper price for imports and basic goods, that argument is for a managed process. In contrast, this recurrent crisis has been chaotic, with the Government distinguished by indecision and confusion, followed by sudden bursts of action which proves ineffective.

So it has proven on this occasion, with the head of the Central Bank putting out and then retracting muddled statements over the possibility of a devaluation of the official rate, the President falling back on rhetoric that economic problems are caused by his enemies, and the Supreme Leader declaring a "resistance economy".

Some, especially if they have access to foreign exchange at the privileged official rate, are profiting from speculation, and exporters would benefit, if they can maintain production and handle restrictions on financial transactions for their goods. However, the leading effect is that the currency fall leads to rising prices, with "spikes" in the cost of some goods. And there are specific episodes, such as this weekend's report that importers of key staples have not been able to get foreign currency at the official rate for the last two weeks.

As the currency crisis builds, so does the political tension. In the last week, criticism of the Government has been resurging, from tycoon Asadollah Asgarouladi to leading MP Ahmad Tavakoli --- relative and ally of Speaker of Parliament Ali Larijani --- whose website Alef was blocked for weeks last month after it featured Tavakoli's call for Parliament to establish supervision of a Government ruining the economy.

Meanwhile, the Supreme Leader appears to be staying out of the fray. Possibly, that is because he wants to avoid the risk of collateral damage, taking blame for the problems of his people. Possibly, it is because his office does not know what to do. Probably, it is a combination of the two.