Friday, January 13, 2012

Dollar & Rial in Tehran

There are several reasons for the recent events in currency market in Iran.

First USD has been and is undervalued in Tehran. Iranian governments since Pahlavi always make the value of Rial a matter of political prestige. According to politicians a strong Rial meant and means a strong economy. However this is an illusion, since this claim is only justifiable if Iran had a strong export base. Iran exports oil, which many consider capital. Thus governments, past and present, have maintained a strong Rial using oil revenues.

Second market has realized this a long time ago, Iranian consumers and businesses have witnessed the collapse of Rial in the past. In a way it was expecting USD to gain value. Imposing sanctions on Central Bank of Iran served only as a trigger to ignite a shock. It signaled the market that CBI might not be providing market with paper money, hard cash, in future. USD was already on the rise, from 11650 Rials at the beginning of summer to 13000 Rials at the beginning of summer. This steady rise was accelerated by the news of sanctions.

Still CBI and government keep a brave face, fighting the tide. The question is if Iranian manufacturers would benefit from these events. They are already squeezed harshly by losing their subsidies. In the past years the undervalued USD and strong Rial encouraged massive imports. Many have already lost their consumers and local markets to Chinese products. The rising dollar for them means increasing cost of parts and necessary material. Acquiring both has already been made impossible by sanctions.

Taking into account the increased cost of transactions and the government increasing fiscal responsibilities, particularly paying out the cash subsidy, one would expect to see a further rise in USD in Iran's currency exchange. It seems many on the ground has already adopted this.

No comments: