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Iran’s currency crisis could bring it one step closer to economic collapse

(CNBC) — By Natasha Turak

Iran’s Currency, the rial, has plummeted to a record low amid growing economic and political uncertainty, causing a rush to the banks as Iranians desperately try to acquire U.S. dollars with exchanges forced to shut their doors to prevent long and chaotic lines.

If unchecked, the crisis, combined with further deteriorating relations with the U.S., could spell severe instability for the Islamic Republic.

The rial has lost one-third of its value this year alone. The currency is now 60,000 to the dollar; when Iranian President Hassan Rouhani took power in 2013 a dollar bought 36,000 rials. The devaluation has been essentially continuous since the country’s 1979 Islamic Revolution, when one dollar bought 70 rials.

To stem the mounting panic, Tehran announced this week that it was setting the official exchange rate at 42,000 rials to the dollar, going against the market — and threatening harsh punishments, including detention, for anyone trying to exchange money at a different rate.

This should keep things under control, for now, said Iran researcher Henry Rome of political risk consultancy Eurasia Group.

“The policy change, combined with new restrictions on foreign currency holdings, will likely succeed in arresting the rial’s collapse in the immediate term,” he said in a research note, adding that the government has sufficient foreign reserves to pull this off. Still, it will continue to hurt Iranian import and export businesses, which have difficulty Accessing Currency from the government and rely more on black market exchanges.

Iran’s woes are not due to a trade imbalance; non-oil exports in 2017 were $47 billion and oil sales hit $55 billion, leaving a currency surplus of $17 billion. The crisis is actually in accessing currency notes, which is estimated at only 5 percent of all foreign currency in Iran, while the rest is available in the form of credits for business.

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