The Main Accused of the Dollar Rate Increase: System Policy or Economic Performance?

The record-breaking dollar rate in recent weeks has obscured Iran's economic outlook and made it more difficult to find solutions for the future of people's "livelihood and welfare." The government has recently called for the removal of four zeros from the national currency to prevent the consequences of the rial's devaluation while simultaneously facing major crises such as electricity and gas shortages. In recent days, the dollar rate has reached the highest record in the history of Iran's economy, surpassing 80,000 tomans for one dollar in the free market on Thursday, December 27. Since the increase in the dollar rate directly affects people's livelihoods and the business environment of economic actors, the current ambiguous situation has become concerning for the people of Iran. Last Monday, December 17, images of protests by Tehran's merchants surfaced, chanting "We do not want a hundred thousand toman dollar." There are also clues on social media indicating that the rate of "one hundred thousand tomans" has become a "psychological barrier" for consumers, and as the price approaches this barrier, concerns have increased. The government sent a bill to the parliament to remove four zeros from Iran's national currency to "preserve its dignity." The rise in the dollar price in recent weeks has multiple reasons. The trend of the rial's devaluation has intensified following developments in the Middle East and increased risks stemming from the possibility of military conflict involving Iran. With the emergence of a fire cycle between Iran and Israel and subsequent developments, such as the death of Hassan Nasrallah, the Secretary-General of Hezbollah, the position of the Islamic Republic in the region has weakened; a weakness that has created a negative outlook for Iran's export routes and has also cast doubt on Iran's infrastructural investments in the region. After the escalation of conflicts in April 2023 and threats from Iranian officials against Israel, it was said that the government had prevented a significant jump in the dollar's value through "currency injection and market-making"; however, shortly after, the upward trend of the dollar rate began again. Concurrently with these developments, Donald Trump's return to the White House has strengthened the likelihood of increased oil sanctions against Iran and even heightened military tensions between Iran and the United States; especially after the U.S. President-elect did not rule out a military attack on Iran's nuclear and military sites following his victory in the November elections. Although the impact of political factors and future risks on the dollar rate cannot be denied, the government's weak economic performance has played a more significant role in the devaluation of the national currency. One of the main factors in the currency's devaluation is "inflation caused by liquidity growth." According to the Central Bank's report, the liquidity volume in September this year surpassed the historical threshold of "9 trillion tomans," with an increase of over 273 trillion tomans in just one month. This index has grown by more than 27.8% in the one-year period ending at the end of the first half of 2023, indicating that the inflation situation remains concerning. Other statistics can also explain the reasons for the currency's devaluation; for example, Iran's trade balance in the first eight months of 2023, excluding crude oil exports, fuel oil, and technical and engineering services, had a deficit of about seven billion dollars. Iran's oil exports were also affected last month due to military conflicts. The website "Oil Price" announced in late October that satellite images and the oil tanker tracking company "TankerTrackers" reported that Iran, in a precautionary move, had removed several oil tankers from Khark Island in the Persian Gulf, which in turn reduced oil exports. Additionally, the state of economic growth also confirms the declining trend of Iran's currency value. A new report from the Central Bank of Iran shows that economic growth in the summer of this year has nearly halved compared to last year, reaching its lowest level in the past three years. According to this data, economic growth compared to the same period in 2022 has dropped from 5.3% to 2.7%. Some economic media in Iran have assessed this data as "a sign of declining oil exports." The decrease in oil exports, the worsening trade balance, and the decline in economic growth not only exacerbate the government's budget deficit but also act as factors weakening the value of the rial. According to a report from the Research Center of the Parliament, the government had a budget deficit of 19 trillion tomans in the first four months of this year, which is expected to reach 270 trillion tomans by the end of the year. After the details of the proposed budget for 2024 were published, it became clear that the government intends to reduce the "basket of preferential currency," subjecting fewer goods to receive subsidies. Accordingly, the currency for essential goods will be reduced from 15 billion dollars to 12 billion dollars, which has strengthened inflation expectations regarding essential goods and affected the devaluation of the rial. Masoud Pezeshkian, the President, also emphasized the "increase in gasoline prices," which has influenced the formation of inflation expectations. He stressed in a budget presentation session to the parliament on November 23 that "one of the existing challenges is the reform of energy subsidies." Since currency traders in inflationary conditions propose higher prices for selling dollars, inflationary signals in the budget have also contributed to the rise in the dollar price. Meanwhile, several officials of the Islamic Republic blame the "Pezeshkian government and the performance of the Central Bank" for the current situation. Among them, a member of the Economic Commission of the Islamic Consultative Assembly recently attributed the increase in the dollar rate to "coordinated actions by the government and parliament using the Central Bank's tools." Hossein Samadsami claimed that the government raised the dollar rate to "compensate for wages." Some government critics also believe that the exchange rate has been increased with the aim of "covering the budget deficit." The newspaper Kayhan, which is close to hardline conservatives, warned on December 27 in an article titled "The Signal of Inflation from the Ministry of Economy of Mr. Pezeshkian; Be Careful" that the government is seeking "shock therapy and giving signals of inflation." In contrast, Abdolnaser Hemmati, the Minister of Economy, cited the "heavy budget deficit" as the main reason for the continuation of inflation and the surge in the exchange rate. Although the government receives more rial equivalent from exports by increasing the exchange rate and will have higher revenues, the "free market exchange rate" has less impact on government revenue than the "exchange rate in official markets," as the majority of transactions in Iran's economy are conducted at official rates such as preferential and semi-official currencies. Concurrently with the increase in the free exchange rate, Iran's official exchange rate has also risen unprecedentedly. The Central Bank suddenly announced on December 13 that from December 15, it would remove the "semi-official currency" from transactions and replace it with "negotiated currency." The semi-official dollar is the dollar that economic actors use for exports and imports, so any change in its rate affects the prices of goods. While the semi-official dollar rate was around 54,000 tomans in the last transactions before the opening of the negotiated system, the negotiated currency rate has surpassed 63,842 tomans since its reopening. Accordingly, it can be expected that government revenues from the sale of export currency will grow.