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Iran's currency: Why did the rial tumble so precipitously? (+video)

US sanctions played a role. However, Iranians aren't blaming the US, they're blaming their own government.

By Roshanak TaghaviCorrespondent / October 4, 2012

An Iranian woman stands in a currency exchange shop in northern Tehran in this January 3 file photo. The value of Iran’s national currency, the rial, plunged to its lowest against the dollar in more than two decades this week.

Morteza Nikoubazl/Reuters/File

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The value of Iran’s national currency, the rial, plunged to its lowest against the dollar in more than two decades this week, plummeting by an estimated 40 percent in the past four days. And while the precipitous drop has been brought on by US sanctions, Iranians are in large part blaming the government's massive economic mismanagement.  

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Amateur footage appears to show Iranians protesting over in Tehran's Grand Bazaar over the slump of the nation's currency. Sarah Charlton reports.

The rial has declined roughly 80 percent in the past year, and the street rate is now around 37,000 rials to the dollar. But economists and oil officials in Tehran say they were less surprised by the breadth of the currency’s depreciation than by the rapid speed at which it fell. Indeed, many have predicted the rial’s continued, albeit gradual, decline for more than a year.

The greatest shock has been on the Iranian street, where people, panicked by the sudden drop in the national currency’s value, have been scrambling to trade their rials for safe currencies such as the dollar and euro.

“Before, the currency situation was dysfunctional, but bearable: The rial was getting worse, but gradually. Now, it’s just falling,” says a Tehran-based businessman who runs a factory outside the capital.  

Though what exactly triggered the sudden currency decline is still unclear, some speculate that the Central Bank’s launch last week of a formal currency “exchange center” may have inadvertantly fed the frenzy for dollars. Intended to control fluctuations in the exchange rate, the center allows importers of basic necessities, such as meat, rice, or oil to purchase foreign currency at a “preferential” rate that is actually only slightly below the street rate.  

“The center made it seem like the government is giving up trying to manage the rate, and is allowing the exchange rate to stay at these numbers,” says a veteran Tehran-based analyst, speaking by telephone on condition of anonymity. “It gave the message to the business community that the government does not have the currency to keep up with the market. Now there is panic.”  

The role of US sanctions 

Economic pressure resulting from US Treasury sanctions is widely recognized as a significant force behind the rial’s massive decline. But the blame for Tehran’s deteriorating economy is being resoundingly placed on the Iranian government itself for failing to cushion the country against the impact of sanctions many viewed as inevitable. Much of the criticism is based on the fact that the government seems to have done little to prepare for a situation it must have seen coming.      

Washington sanctions foreign firms that purchase Iranian oil and penalizes banks engaging in financial transactions with the Islamic Republic. It first implemented financial sanctions on Iran in 2006, and four rounds of sanctions by the United Nations Security Council followed. 

Tehran’s banking system became increasingly squeezed after 2007, as Washington boosted efforts to get US allies and other foreign governments and private entitites to implement unilateral financial sanctions imposed by the US Treasury.

“This government has been the richest in the history of the Islamic Republic, and while it should have reserved billions of dollars for a future day like today, it did not,” says the Tehran-based analyst. 

Between 2005 and 2011, Tehran earned an estimated $465 billion from oil exports alone, according to data from the Organization of Petroleum Exporting Countries. Critics of Iranian President Mahmoud Ahmadinejad say his administration’s extravagant spending during this period – on infrastructure and housing projects, subsidized loans, and cash handouts to lower-income and working-class Iranians – boosted inflation and diminished Iran’s currency reserves. 

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