Why Has the Currency Spring Been Released Again?

As predicted, the currency spring in Iran has once again been released, and the rate of the US dollar in the free market of Tehran, which fluctuated around three thousand seven hundred tomans at the beginning of the year 1396, started advancing into the four thousand six hundred tomans channel by the end of the tenth month of that year. It has been proven once again that evading realities and refusing to accept a gradual increase in the exchange rate based on unavoidable economic variables creates the conditions for severe currency jumps, similar to those that have repeatedly shaken Iran's economy in the past. The 'dollarization' of the Iranian economy is a normal phenomenon in the international economy, where currency fluctuations and changes in exchange rates occur continuously without stirring public excitement or becoming the main news in national and global media. In 2017, the value of the Euro against the US dollar increased by fourteen percent, and this increase has continued into the new year. However, the vast majority of Europeans and Americans are unaware of this event, and even if they do find out, they will pass by it indifferently. The British pound, Japanese yen, Indian rupee, Brazilian real, and many other lesser-known currencies are caught in similar fluctuations, yet they do not necessarily rob the masses of their sleep or become topics of conversation. In comparison to this 'normal world,' how is it that Iranians have been fixated on the ups and downs of the currency market for about forty years, with a large portion of them practically becoming currency traders, tying their normal life to the fate of the rial and its relationship with the dollar, whether rightly or wrongly? In fact, the profit and loss of a significant portion of Iran's economic actors, from exporters and importers to producers and consumers and savers, hinge on currency fluctuations. Money is a mirror of the power of countries, and the gradual conversion of the dollar from under ten tomans to four thousand six hundred tomans signifies an endless retreat of their economic boundaries for Iranians. Of course, in this very complex and unhealthy relationship with currency, Iranians are not alone. Several other so-called national currencies, from the Venezuelan bolivar to the Algerian dinar, are similarly deprived due to reasons such as the dependency of the countries holding these currencies on oil as a single or major source of currency supply, their lack of the necessities of a twenty-first-century economy, and their backward foreign trade structures, finding themselves in a situation similar to the rial and even much worse (bolivar). Nevertheless, despite some commonalities, each of these countries naturally has its own characteristics regarding its national currency and international currencies. Over the past four decades, the relationship of Iranians with the rial has turned into a national tragedy, and the fall of this currency's exchange rate against the greenback showcases their economic decline. The fact that the value of Iran's national currency against the dollar has plummeted to one four-hundred-sixtieth over this period signifies the loss of their monetary independence. When in a country, for many calculations related to the role of money, the dollar takes on the role of a measuring stick and becomes the guardian of people's savings, how can one deny the 'dollarization' of that country's economy? Of course, a decrease in a country's currency value against competing currencies is not always a sign of weakness. For a relatively long period, the Japanese kept their national currency's exchange rate artificially low to make their exports cheaper and imports more expensive. China is currently following this method by preventing the yuan's value from rising to its real level, thereby enhancing the competitiveness of its goods to increase export volume. There is even a growing belief that the current weakening of the US dollar against the euro is related to the desires of US monetary authorities to increase exports and reduce imports. This is a very old phenomenon in international trade relations known as 'currency dumping.' The issue is about using the depreciation of the national currency in the context of a 'trade war.' The strategic importance of the exchange rate is another matter. What has occurred in the Iranian monetary scene over the past four decades is the exact opposite of what has happened in countries inclined to use currency depreciation in the service of a 'trade war.' Unlike those countries, the Central Bank of the Islamic Republic has, whenever possible, tried to prevent the depreciation of the rial's exchange rate by injecting large amounts of oil dollars into the currency market. We know that these efforts were in vain, and the rial, despite receiving artificial strengthening remedies, ultimately retreated under the heavy burden of realities. With each retreat, senior officials of the Islamic Republic and the Central Bank assured Iranians that everything was safe and sound, that further depreciation of the rial's exchange rate was out of the question, and that even lost positions could be regained. This time, however, Valiollah Seif, the head of the Central Bank, assured that 'the exchange rate will definitely decrease in the coming days, as the Central Bank's reserves are at a very suitable level, and there is no cause for concern.' Hassan Rouhani, the President of the Islamic Republic, also emphasized in his televised conversation on the evening of February 21 that 'the people should know that the country's foreign income is far greater than the total foreign expenditures... The government's promise to the people is to provide the necessary currency for the country...' The question is, if Iran's currency situation is as favorable as Valiollah Seif and Hassan Rouhani claim, why has the country once again fallen into a currency shock? What factors caused the currency spring to be released again? Given the strategic importance of the exchange rate, especially in the Iranian economy, the primary duty of the country's officials is to inform the people of the economic realities. The exchange rate is primarily shaped by economic realities. We mentioned that a currency can be offered at a price lower than its actual value, just as the Japanese did years ago and the Chinese are doing today. In contrast, offering a currency at a price higher than its actual value is much more difficult, and reality reveals itself in a short time. If Iran's money is losing its value, it is due to the role of real economic variables, and attributing this decline to temporary factors (such as pilgrimage trips, the last two months before Nowruz, and similar factors...) leads nowhere. In this context, the role of political factors within the country and its international environment should not be forgotten. Currency fluctuations are also influenced by psychological factors, and these factors are naturally taken into account due to their impact on the country's economy and, consequently, the price of currency. Here, to understand the recent currency shock in Iran, we emphasize these fundamental economic factors while also considering the political and strategic factors: a) Economic factors - Here we emphasize three factors: inflation, the money market, and foreign trade, which have most affected the recent decline of Iran's national currency: 1) The most important factor in the surge of the exchange rate in Iran is high inflation. In establishing the exchange rate between two currencies, inflation plays a primary role, but it is certainly not the only factor. The inflation rate in Iran, based on official statistics from the Islamic Republic, fluctuates around ten percent. This rate, when compared to the era of Mahmoud Ahmadinejad's presidency, is indeed lower, but compared to the average inflation rate in the world (around three percent) or in the industrial world (below two percent), it is still high. In other words, Iran still has a long way to go in the fight against inflation. From an economic logic perspective, the difference between the inflation rate in Iran and the dollar region, which is currently around eight percent, should be reflected in the exchange rate between the rial and the dollar. In other words, the value of the dollar in Iran's currency market should gradually increase by about eight percent each year. During the first term of Hassan Rouhani's presidency, despite the fact that Iran's inflation rate was higher than today, the value of the dollar against the rial did not rise significantly. In fact, it was the Central Bank that injected dollars into the market to prevent the decline of the rial's exchange rate, thinking it could prevent the return of inflationary tensions. But is fighting inflation by artificially maintaining the exchange rate the right approach? In reality, the Central Bank, by putting pressure on the currency spring, blocked its expansion. There were many experts who warned that as soon as favorable economic and political conditions arose, the currency spring would be released, and the price of this 'commodity' would soar instead of rising gradually. This prediction has now come true, and the experiences of the years 1374, 1381, and 1391 have been repeated. 2) Another factor that has affected the recent surge in the exchange rate is the administrative reduction of bank interest rates. Last August, the Central Bank issued a directive asking banks and credit institutions in Iran to adhere to previously agreed regulations regarding the ceiling on bank deposits. Based on these regulations, the ceiling for the nominal interest rate on bank deposits was reduced to a maximum of fifteen percent. With the reduction in interest rates, some depositors have moved their assets out of the money market, primarily into the currency market (and partly into the housing market). This is one of the factors increasing demand for currency and consequently raising its price. There is no doubt that interest rates in Iran are very high compared to many countries. But this is the price that Iranian savers demand to protect their assets against inflation and various risks (from the risk of bank bankruptcies to the collapse of the national currency). Such an arrangement cannot be disrupted by a directive, and now that it has been disrupted, it leads to disorder in other markets, including the currency market. 3) Iran's foreign trade has also played a role in creating the current currency tensions. In the first nine months of the current solar year, the non-oil trade balance of the country has a deficit of about six billion dollars due to a surge in imports and a decrease in exports. In this statistic, the figure for smuggled goods imports is not accounted for. This deficit has naturally weakened the rial and impacted the currency market. b) Political factors - Political tensions within Iran and two major events in Iran's international environment have played a very important role in creating the recent currency shock: 1) The very unexpected waves of public protests against the Islamic Republic in many cities in Iran have naturally fueled the atmosphere of uncertainty in Iran. In relation to this tense atmosphere, how much currency has left the country? 2) The obsessive pursuit of Donald Trump in his threats against the 'JCPOA' and the sharply increased likelihood of the US's final exit from this agreement has also fueled the atmosphere of uncertainty in Iran's international environment, and the fear of intensified sanctions against the Islamic Republic has naturally weakened Iran's national currency. 3) The European Union, unlike the United States, is committed to preserving the 'JCPOA,' but at the same time is ready to impose sanctions against Iran concerning issues that Washington is highly sensitive about, including the Islamic Republic's missile program and its role in the Middle East. However, new sanctions, from the European perspective, should not undermine the 'JCPOA.' Despite the differences between American and European positions regarding the 'JCPOA,' the proposal to impose potential new sanctions against the Islamic Republic by the European Union increases despair in Iran's business environment and raises questions about the future more than ever. Despair increases when Majid Takht-Ravanchi, one of the Iranian officials participating in the 'JCPOA' talks, states: 'If Europe also does not comply with the JCPOA, it will not be the end of the world.' This statement, which some Tehran media have described as 'clumsy,' conveys the message that Europe's exit from the 'JCPOA' could also happen. A combination of these factors has created the first currency shock of Hassan Rouhani's presidency. To counter the consequences of this shock, Hassan Rouhani has an important trump card: the relatively favorable state of the global oil market. On the other hand, his potential weakness, in addition to future tensions in Iran's political environment, is the possibility of the sanctions wheel starting up again, which could prevent Iran from reaping the benefits of the oil market boom.