Iran's Currency Market and the Fate of the JCPOA

The recent fluctuations in the Tehran free currency market are not a new occurrence. For about forty years, the volatility of the rial against the dollar has been among the most newsworthy economic events in Iran, placing Iranians among the world's most 'currency-savvy' people. The dominance of the dollar by Europeans and Americans primarily reveals their national currency's exchange rate against other currencies during their transitions abroad. However, despite the intense official rhetoric against the U.S., Iranians have accepted the dollar as a benchmark for measuring the real value of many goods and as a savings tool, effectively using it parallel to their national currency for economic calculations. Even in the calculations and reports of the Central Bank of the Islamic Republic, the dollar plays a primary role. In this context, the continuous monitoring of dollar fluctuations by a significant portion of the population in large and medium-sized cities in Iran is not surprising. The past four decades have seen successive peaks of the dollar. Once, a thousand-toman dollar was an unattainable peak for them, before they adjusted to two-thousand, three-thousand, and today, four-thousand tomans. The latest peak was experienced by Iranians last December, but the U.S. greenback temporarily retreated due to currency injections into the market by the Central Bank. This time, however, it seems that the four-thousand toman dollar has likely settled in the currency market, with questions focused on the possibility of its advance towards the five-thousand toman peak. Even if we consider the four-thousand toman dollar (slightly higher or lower) as a concluded phenomenon, an unavoidable question arises: why has the currency market once again become heated and pushed the dollar beyond four thousand tomans? Some answers to explain this event emphasize internal factors, including that the reduction in bank interest rates has led some savers to shift from the money market to the currency market, especially given that the stock market is not performing well and the housing market is also in a clear state. Several other temporary factors have also been highlighted to explain this event, including that in Iraqi Kurdistan, due to the tensions that have arisen, banks and currency exchanges are trying to meet part of their currency needs from the Iranian market, which has increased demand for currency in the country. If international sanctions against Iran are re-imposed, even in a limited manner, will Iran still have the necessary currency resources to carry out its economic policies? Regarding the exchange rate, this question is posed as follows: in the event of increased international pressures, will the Central Bank of the Islamic Republic have the necessary currency resources for 'market-making' as before and be able to prevent the surge in exchange rates and its advance towards the peaks of five and six thousand tomans? These factors are not sufficient to explain what is currently happening in Iran's currency market. It seems that, as in many previous cases, the dollar rate in Iran has mainly risen in relation to current events in the country's international relations. Naturally, attention is focused on the fate of the JCPOA in relation to the upcoming decision of the U.S. President. Whatever this decision may be, public opinion and economic circles in Iran have concluded that the July 2015 nuclear agreement between Iran and the group known as the 'P5+1' is no longer what was expected. The United States, the main power behind the JCPOA, has changed its behavior regarding it, and there is concern that very soon, one of the wings of this agreement or all of it, which had been so hoped for, will be dismantled. Foreign policy and currency value This outlook, for obvious reasons, cannot be without impact on the fate of Iran's national currency. In all regions of the world, whether developed or developing, the internal and external political atmosphere affects several economic variables. Recently, we saw that the Catalonia crisis and the potential for the collapse of Spain weakened the euro against the U.S. dollar. In a country like Iran, with its economic characteristics, the impact of foreign policy on the currency market is naturally more intense. We know that Iran essentially has a highly inward-looking economy, meaning that its production units (except for oil) are oriented towards the domestic market and lack the necessary capacity to export goods abroad (except for a few limited regional markets). However, on the other hand, if Iran is considered solely in terms of exporting raw materials, it has a highly outward-looking economy, as it relies on the massive export of a single commodity (oil) to global markets and imports a large portion of its needs, including food. In other words, Iran, with this passive and single-product outward orientation, is highly dependent on foreign trade. If the degree of an economy's dependence on foreign trade is measured based on the ratio of exports and imports to gross domestic product, Iran's dependence on foreign trade is at a higher level than that of the United States. The impact of external economic sanctions against an economy must also be considered in relation to this factor. This is where the comparison between Iran and North Korea regarding their degree of susceptibility to external sanctions comes into play. North Korea has one of the most closed economies in the world, with most of its trade limited to exporting minerals to China, and it has organized itself based on 'self-sufficiency.' For this reason, North Korea's ability to withstand international economic sanctions is far greater than Iran's, which has its annual budget practically tied to oil wells, all its stakeholders, both military and civilian, addicted to oil dollars, and its monthly cash subsidies and pension funds linked to oil money, and its regional influence has also been achieved based on spending oil rents. In this situation, any event that can change Iran's international environment and create even limited changes in oil exports and imports will impact the country's economic variables, and this impact is most reflected in the currency market. In fact, about eighty-five percent of Iran's annual currency resources are concentrated in the hands of the government, as most of these resources come from oil exports that are deposited into the government's treasury. According to the 'World Trade Organization,' Iran exported sixty-six billion dollars worth of goods last year, of which, based on what is obtained from Iran's foreign trade statistics, forty-two billion dollars came from oil and gas condensate exports, all of which belong to the government. Of the twenty-four billion dollars in annual non-oil exports, a significant portion is conducted by state enterprises, and its currency is deposited into the public treasury. 'Market-making' in the currency sphere Of course, Iran has other currency resources. Foreign tourists bring currency with them. Foreign investors are also a source of currency inflow into the country. But even these secondary factors for securing Iran's currency resources will naturally be destabilized with the questioning of the JCPOA, especially by the world's most powerful country. In short, any change in the international and domestic environment that can limit Iran's foreign currency income sources cannot fail to impact the country's currency market. In fact, the government and the Central Bank use their currency reserves to prevent the dollar rate from rising or, in reality, artificially keep the exchange rate of the rial against the dollar high. In other words, the Central Bank engages in 'market-making' in the currency sphere and whenever it deems necessary, if its currency reserves allow, it injects currency into the market to support the rial. If this 'market-making' did not exist, the U.S. dollar would have long ago surpassed the five-thousand toman peak. Why does the Central Bank spend billions of dollars from its currency reserves each year to prevent the further advance of the currency price? From the perspective of the Central Bank's strategists, the goal of this action is primarily to prevent inflation from surging. In other words, bringing the inflation rate down to around ten percent comes at the cost of injecting a massive amount of dollars, and the government fears that with a dollar at five thousand tomans or more, the Iranian economy will once again get caught in the whirlwind of high inflation. Some Iranian economists from the liberal spectrum strongly oppose this kind of 'market-making' for currency, assessing it as dangerous. From their perspective, the government should allow the dollar to find its real price in the market, and if this is prevented, the unification of the currency rate will never be realized. Addressing this point, which is very important, requires another opportunity. Today, no one knows for sure what U.S. President Donald Trump has in mind for the future of the JCPOA. The various scenarios based on speculation complicate calculations. Nevertheless, one point seems certain: the most important economic power in the world and the main hub for negotiating, regulating, and signing the JCPOA is now at odds with this agreement. In this situation, the specter of past sanctions, rightly or wrongly, has resurfaced. In connection with this fear, the question arises: if international sanctions against Iran are re-imposed, even in a limited manner, will Iran still have the necessary currency resources to carry out its economic policies? Regarding the exchange rate, this question is posed as follows: in the event of increased international pressures, will the Central Bank of the Islamic Republic have the necessary currency resources for 'market-making' as before and be able to prevent the surge in exchange rates and its advance towards the peaks of five and six thousand tomans? In this fear, Iranians are not alone. Some European economic enterprises that accepted the investment risk in Iran during the 'post-JCPOA' era are raising similar questions. Also, according to some reports, some Asian buyers of Iranian oil, considering the potential for new sanctions against the Islamic Republic, are examining the possibility of reducing their oil purchases from Iran.