Iran Currency Hits Record Low, Crashing Through 50,000 Mark
The Iranian rial fell to a record-low on Monday, breaking through the 50,000-to-the-dollar mark for the first time, with analysts blaming uncertainty stemming from Washington.
The rial has lost around a quarter of its value in the past six months to reach 50,860 against the US dollar according to the Financial Information Market, a trusted website for fluctuations on the open market.
The gap with the official rate, which stood at 37,686 on Monday, has continued to widen. Iran's government took drastic measures last month to stem the decline in the free market rate, arresting foreign exchange dealers, freezing speculators' accounts and raising interest rates, as well as buying up millions of dollars in a bid to lower the price.
But on the streets of Tehran, long queues continued to gather outside foreign exchanges in the build-up to the Nowruz New Year holiday, which is running for another week.
"The issue is psychological rather than economic. There's no reason to buy dollars except in the hope that you can sell them later at a higher rate," said Esfandyar Batmanghelidj, founder of the Europe-Iran Forum, a business network.
He said Iranians were reacting to worrying headlines from the United States, where President Donald Trump recently appointed two hardline anti-Iran figures to his administration: Mike Pompeo as secretary of state and John Bolton as national security advisor.
Many analysts believe Trump will pull out of the 2015 nuclear deal with Iran when it next comes up for renewal in May, bringing back crippling sanctions.
"I see many people looking to invest in neighbouring countries because this fear is spreading about the future of the JCPOA (nuclear deal)," said Navid Kalhor, a Tehran-based financial analyst.
Local officials have complained that Iranians are hoarding billions of dollars, while local banks run short of cash "I have friends who go to banks and ask for 15 or 20 million tomans (150 million or 200 million rials, $3,000 or $4,000) and they're told to come back in a week because they're out of cash," said Kalhor.
The devaluation poses a major problem for President Hassan Rouhani's government, which had hoped to attract massive foreign investment in the wake of the nuclear deal.
Already facing huge obstacles from remaining, non-nuclear US sanctions, the collapsing currency will serve as another deterrent to potential investors, Batmanghelidj said.
"Even in an instance where an investor is willing to operate in Iran, the devaluation is very concerning. If you invest now and the currency falls even 15 percent, you have to discount that from your returns, and that's very difficult to hedge against," he said.
"This will be difficult for the government. There is very little they can do about the mentality of individuals."
The government has resisted unifying the official and free-market rates of the rial because it would mean more expensive imports and therefore higher inflation.
But analysts say the gap has distorted trade and fueled corruption. Perhaps the biggest challenge is that hoarding dollars has become a preferred way to store money amid economic uncertainty, especially after a housing boom stagnated after years of over-construction.
Iranian banks have tried to counter this by offering interest rates as high as 20 percent.
But speculation on the dollar has become an endemic problem. The Iran newspaper reported last month that 775 people's accounts had been frozen on suspicion of distorting the foreign exchange market with capital movements totaling 200 trillion rials (over $4 billion).
This has only fueled wider problems in the economy by discouraging investors from putting their money into businesses. "The situation in the economy right now is far from beautiful," said Kalhor.
Photo Credit: Wikicommons