Why Has the Rial Once Again Slipped into Decline?

The increase in international currency prices against the rial continues. In the last hours of currency trading on Saturday in Tehran's currency market, each US dollar was traded at 4082 tomans, which shows an increase of eight tomans compared to previous days. The price of the euro in the same market was 4805 tomans, indicating a 20 toman increase. Additionally, a quarter of a gold coin was traded at 389,700 tomans, reflecting an increase of nearly 3000 tomans compared to previous days. However, the warm coins were offered at 254,000 tomans without any price increase, while gold prices in the global market have decreased, with the average global price of an ounce of gold being $1275.13, which has dropped by more than a dollar. Observing these developments raises the question of why international currency prices are increasing under current conditions. Inflation is identified as the main factor in the decline of the rial's value. Several factors can explain the fluctuations of the rial against international currencies. Macroeconomic factors such as inflation or fundamental factors like supply and demand each play a role in determining international currency prices. Psychological factors can also indirectly affect international currency rates through the aforementioned fundamental factors. The impact of macro and fundamental factors is stable, while the role of psychological factors is quick and transient. The continued decline of the rial against international currencies indicates that macro and fundamental factors have a greater role in the depreciation of the rial. In this context, inflation, as an indicator of the diminishing purchasing power of Iran's national currency, has played a significant role in the rising costs of international currencies. It seems unlikely that Iran's inflation rate will be lower than international inflation over at least the next five years. Therefore, one should expect that the price of the rial will decrease even in the near future. The latest statistics from the Central Bank and the Statistical Center indicate the continuation of the inflation rate in Iran—meaning the index of the diminishing purchasing power of the rial—which is significantly higher than the global average inflation rate. Thus, this mild increase in international currency prices is not surprising and is justifiable given Iran's inflation rate. Consequently, as long as Iran's inflation rate remains higher than the global average, the depreciation of the rial will continue. Furthermore, the outflow of deposits from banks and their influx into the currency market can also contribute to rising international currency prices alongside inflation. Finally, one hypothesis is that the government may wish for currency prices to rise, which is why it has reduced its injection of currency into the market, contributing to the increase in international currency prices. Why is the government pursuing a rise in the dollar price? Currently, the government is drafting the budget for the upcoming year and must consider a specific rate for the dollar price and currency conversion. One hypothesis is that in line with the unification of currency rates, the government intends to sell currency at a higher price to reduce the budget deficit while simultaneously benefiting from the positive effects of currency price increases, such as preventing rent-seeking in the currency market, reducing imports, and making the prices of Iran's exported goods more competitive. If the government sells the dollar at a price lower than the market price, it creates a rent that will go into the pockets of currency market speculators. Additionally, a low dollar price offered by the government can encourage imports and hinder the increase of exports. Therefore, the increase in the price of the dollar offered by the government has positive consequences. For the reasons mentioned, one hypothesis is that the government will gradually agree to raise the dollar price to encourage exports, reduce imports, balance the budget, and prevent rent-seeking in the currency market, accepting the unification of currency rates in the market. However, to avoid economic and political shocks, the government will accept this increase in currency prices step by step and gradually, and a reduction in the supply of government currency to the market may indicate such a policy. Can the budget deficit be controlled solely by increasing currency prices? The government's priority should first be to reduce current expenditures, especially payments to political and religious institutions; otherwise, the revenue from increasing currency prices will again go into the pockets of rent-seekers. The question arises whether the government can resolve the budget deficit and bring it to balance solely by increasing the dollar price. The budget deficit in Iran has various causes. Generating revenue by increasing the currency rate is one solution, but it is not the best solution. The most significant reason for the budget deficit is the misallocation of resources for rent payments to institutions that do not yield adequate returns, such as political and religious rent-seeking institutions that consume public resources without accountability and transparency. One of the main reasons for inflation in Iran is the inappropriate structure of the budget and the feeding of rent-seeking institutions with public budgets. Increasing the dollar price can bring advantages to Iran's economy, but only if the government accompanies it with other policies, including restructuring the budget. Therefore, the government's priority should first be to reduce current expenditures, especially payments to political and religious institutions; otherwise, the revenue from increasing currency prices will again go into the pockets of rent-seekers, and no tangible results will come from increasing currency prices. In other words, the government's increase in the dollar price, while simultaneously feeding rent-seeking institutions with the revenue from increasing the dollar price, will trap Iran's economy in a vicious cycle.