Iran’s government is trying to contain a currency crisis after the rial hit an all-time low, triggering panic-buying of dollars, political uncertainty, and nationwide unrest.
Thousands of stores Tehran’s Grand Bazar pulled down their shutters in protest on 25th June as the real exchange crisis has severely contracted demand for goods.
Iran is home to one of the world's oldest continuous major civilizations, with historical and urban settlements dating back to 7000 BC. Iran is the descendant of a series of powerful empires, the most famous of which was the Persian Empire. Lasting roughly from the 500s BCE to the 600s CE the Persian Empire was one of the most powerful and culturally influential empires in Asia and the Middle East. The territory of Persia stretched from Persepolis and Isfahan into Egypt and Anatolia in the West and all the way out to India and the Himalayas in the East.
The rise of Muslims coincided with an unprecedented political, social, economic and military weakness in Persia. Once a major world power, the Sasanian Empire had exhausted its human and material resources after decades of warfare against the Byzantine Empire. The Muslim Conquest brought an end to Zoroastrian religion with many scriptures being burnt and priests executed. Although Persians adopted the religion of their conquerors, over the centuries they worked to protect and revive their distinctive language and culture, a process known as Persianization.
With the onset of colonisation of Asia and Africa, Iran was never colonised by any European power, but the discovery of oil eventually led to British officials exercising near autonomy over production and exports. The Pahlavi dynasty ruled from 1925 to 1979 during which land reforms, enfranchisement of women and nationalisation of oil refineries took place. However, the failure of reforms to substantially improve the Iranian economy fermented the rise of the Islamic Revolution wherein Ayatollah Khomeini converted the monarchy to a theocracy. Iran's rapidly modernising, capitalist economy was replaced by populist and Islamic economic and cultural policies. Much industry was nationalized, laws and schools Islamicized, and Western influences banned.
A relatively stable country in the tumultuous region of West Asia, Iran has supported the Assad administration in Syria and denounced the existence of the state of Israel. The country's central location in Eurasia and Western Asia, and its proximity to the Strait of Hormuz, give it geostrategic importance.
Iran’s economy is highly dependent on oil exports, but lost billions in trade when UN imposed sanctions because of their nuclear programme. The Trump administration withdrew from the deal in May 2018 which led to the imposition of secondary sanctions which target international banks that conduct business with Iran’s oil sector.
Ahmad Karimi Isfahani, the general secretary of the Islamic Society of Tehran Guilds and Bazaar said that shopkeepers opened their shops after the strike to resume activities, but that did not mean that their demands have been met. "We have repeatedly given the authorities notices and we cannot control the market situation with current the current state," he said.
Turbulent developments in the past few months on the foreign exchange and gold markets in Iran and the government’s failure to manage runaway prices has compelled some economists to start using the term “bubble economy.” Asset prices, especially real estate and gold, are currently dominated by speculative investments over real demand in Iran. There are a number of reasons to explain the devaluation of the Rial.
Firstly, inflationary effect as an externality of devaluation has not been contained. Secondly, the Central Bank of Iran (CBI) has failed on two counts: shortage of fund injections and necessary systems upgrade to match growing international trade to clear accounts. Thirdly, the ongoing ambiguity surrounding exchange rate policies, and the long-promised unification of the official and free market rates, continue to unsettle the market, which enters into panic mode whenever there are sudden fluctuations.
Hard currency purchases have increased owing to its use as a hedging mechanism. Furthermore, it is a better form of investment than real estate and financial assets which have been overrun by speculation.
For years, the CBI has announced plans to unify the dual rates. Yet given that the two-tiered system offers an easy platform for corruption and profit, the fact is that there are stakeholders who oppose a rate unification. Economic expert Albert Baghzian believes that the key responsibility of the current distortions in the market lies with the CBI. He says that as long as Iranian society feels as it is in a crisis mode, there will be a push toward parallel markets. Moreover, the key shortcoming of Iran’s economy is the lack of a proper capital market.
Currently, 1 United States Dollar equal 42,646.50 Iranian Rial
According to Navid Kohler, an equity research analyst at Tehran Stock Exchange, the anxiety of shifting liquidity from bank deposit certificates and other static assets toward capital markets may ironically end up strengthening the Iranian economy.
Our assessment is that the Iran requires an immediate overhaul of their monetary policy in order to curb increasing liquidity rate and the growth of non-financial assets. We feel that the best solution against such economic crises is greater transparency and focus on technocratic remedies. We believe that a prudent method to fix the crisis is to fight the underground economy