As the Rial’s Value Drops, Pressure on the Raisi Government Grows

The value of the Iranian rial fell sharply in February 2023, decreasing from 440,000 rials per U.S. dollar to around 600,000. Although Iran’s currency stabilized in early March and has since remained constant at 470,000 rials, its current value is only temporary and is likely to fall further. In fact, since the beginning of the year, the worth of the rial has tumbled by approximately 30 percent against the dollar—a development that bodes poorly for the future of Iran’s already precarious economy.

Downward Spiral

The rial’s decline has been driven by a combination of external and internal trends. The foreign policy outlook of Iran has darkened significantly over the past year, with the Islamic Republic remaining ostracized from the international community and subject to heavy sanctions. The execution of British-Iranian Alireza Akbari for alleged espionage in January, and the death sentence passed on Iranian-German Jamshid Sharmahd for the same charges the following month, were each protested by Britain and Germany. In the latter case, both sides expelled a number of each other’s diplomats. Once the primary advocates for negotiating an end to international sanctions, many powerful European states have now turned their back on Iran.

Many other factors have combined to isolate Iran from international financial markets and cause its currency to slide.  The brutal repression of the Mahsa Amini popular protests, the discovery of 84% enriched uranium in Iran’s nuclear facilities, the regime’s choice to send drones to aid Russia’s invasion of Ukraine, the deadlocked nuclear negotiations, the plethora of human rights violations, the smuggling of dollars across the Iraqi border into Iran, and the continued tirades of Iranian leaders against the West have led potential partners to visibly harden their stances against Iran. Perhaps unsurprisingly, this broad diplomatic shift has led to little, if any, introspection in Tehran. Abbas Araqchi, Iran’s former deputy foreign minister, warned government officials in February that states across the world had conspired in a campaign to “defame and delegitimize the Islamic Republic,” which he claimed would “affect our foreign relations and reduce our cooperation with other countries.”

Domestic financial troubles have also contributed to the rial’s decline. Bank debt has climbed, as has the debt that the government owes to the central bank. The public sector collectively owes 410 trillion rials, and the banks owe 510 trillion rials to the Central Bank. Bank overdrafts have become more common—straining liquidity even further. According to reports, within 9 months of the Raisi administration, the amount of banknotes in circulation increased by 18% and reached 855 thousand billion Rials. The Raisi government’s responses to fluctuations in the rial’s exchange rate have ranged from routine, low-yield measures to pure helplessness. The current administration, like that of its predecessor, Hassan Rouhani, responded to the devaluation of the rial by selling subsidized currency for the entry of essential goods to official and select traders. Like Rouhani, these simple measures have done little to stem the currency’s downward spiral.

Raisi has also pushed through personnel changes aimed at keeping the crisis under control. The president changed the chief of the central bank on December 29, 2022, installing Mohammad Reza Farzin. The new chief set the government exchange rate assigned to traders to import essential goods at 285,000 rials, but the exchange rate failed to remain at this price and increased to 600,000 rials.

In the face of these failures, the Raisi administration has turned to the simplest and easiest mechanism for addressing political crises: spreading conspiracy theories about foreign intervention. On February 27, Raisi condemned the recent slump in the value of the rial, describing it as a result of the machinations of “enemies” that aimed to undermine the Iranian people’s support for the Islamic Republic. In early March, Economy Minister Ehsan Khandouzi told reporters that the “saboteurs” of the foreign exchange market had been identified and that the country’s security, intelligence, and judicial institutions would “deal” with currency manipulators.

It seems that the government, for all its efforts, is largely helpless to stabilize the exchange rate. Some officials, like Vice President Mohammad Mokhber, have simply accepted the rial’s weakness, telling lawmakers, “That is how it is. Take it or leave it.” Others have tried to paper over the weaknesses inherent in Iran’s monetary policy; central  bank chief Farzin launched the “currency and gold exchange center,” a system copied from Russia’s experience protecting the ruble after its invasion of Ukraine, to buttress the value of the ria. In this system, foreign exchange resources from the export of petrochemical and mineral products are deposited in a special fund under the supervision of the Central Bank for merchants use in importing the country’s essential needs at a lower price than dollar rate in the open market. On February 21, when this system was introduced, the exchange rate was 498,000 rials for one dollar, five days later one dollar was worth 600,000 rials. Although in the following days the rial’s value steadily increased, the currency and gold exchange platform is merely a short-term solution for Iran’s pervasive foreign currency liquidity problems.

Adding Fuel to the Fire

The increase in the price of the dollar has caused Iranians to take to the streets in protest. On February 28, retirees held rallies across several cities demanding the resignation of the government for failing to respond to the cost of living and financial crises that have engulfed the country. Ordinary citizens find their economic situation deteriorating rapidly amid devastating inflation. Urban inflation hit 52.7% in January, up 2.1 percentage points from December, according to Iranian government statistics.

Poverty in Iran has doubled over the past year. According to official figures released by the Ministry of Welfare, About 30 percent of Iranians are in absolute poverty, and according to experts’ assessments, about 60 percent are in relative poverty. According to the report of the Statistics Center, the cost of housing accounts for 35-50 percent of a typical Iranian household’s expenses. In some cities, people have to use shared houses to pay the rent.

Following the rial’s slide, many Iranians moved to buy dollars and gold to protect what assets they have. So many distrust the financial and economic policies of the government that they convert the rials in their hands into dollars or gold, which will better weather future headwinds. Earlier, Mohammad Mokhbar admitted that the people did not trust the government’s promises. “When we say we will cover essential needs, [people] don’t believe us,” he said in a speech at a conference.

President Raisi constantly talks about hope for the future and economic optimism in his speeches. However, the economy has undoubtedly worsened under the policies of his administration. Contrary to the president’s promises, inflation has not been contained. His promise to build one million housing units every year in the first year of his government has not been fulfilled, and the dollar, worth 257,500 rials at the time of beginning his presidency on August 3, 2021, has reached a value of 540,000 rials after one and a half years of his stewardship.

The depreciation of the rial has resulted in widespread disillusionment among citizens, who do not trust the government nor believe in its economic promises. As discontent with the country’s political elites grows, Iranian elites have begun shifting their capital out of the country, to the markets of Dubai and Turkey. Educated citizens and specialists are leaving the country in droves, and a shortage of healthcare workers threatens to weaken an already cash-strapped public service even further. This procedure has led to the outflow of Iranian capital to the markets of Dubai and Turkey and has caused many specialized and educated people, such as physicians, to migrate abroad, and the country is currently facing a shortage of healthcare workers. If these trends continue, Iran could come to resemble neighboring Syria: a devastated country in which a handful of oligarchs rule over millions of starving, impoverished supplicants, and in which all citizens with the means to emigrate have already done so. The rial’s decline could be reversed with sound economic policy and concessions to the West, but every day that the Iranian government chooses to pursue conspiracy theories over financial stability moves the specter of a dark future marginally closer.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.