Iran’s Rial Hits Historic Low As US Sanctions Loom

In this April 4, 2015, photo, Iranian and U.S. banknotes are on display at a currency exchange shop in downtown Tehran, Iran. (Vahid Salemi / AP)

Iran’s currency, the Rial, fell to a record low on July 29^th. It dropped past 100,000 rials to the US dollar, which is a historic low. However, it is noteworthy that the unofficial exchange rate is above 100,000 rials to the US dollar, the official exchange rate is about 44,000 rials to the US dollar.

This comes just before US reimpose the first lot of sanctions on the Iranian economy on August 7^th. The sanctions were reimposed on Iran by the US after Donald Trump’s withdrawal from the Iran Nuclear Deal on May 8th.

After the withdrawal of the US from the Iran Nuclear Deal, the EU pledged to help Iran deal with the nearing sanctions. On July 6^th, French Foreign Minister Jean-Yves Le Drian spoke to RTL radio, saying “We are trying to do it before sanctions are imposed at the start of August and then another set of sanctions in November. For the start August it seems a bit short, but we are trying to do it by November.”

The rial has lost about half of its value since April because of a vulnerable economy, financial difficulties at local banks and heavy demand for dollars among Iranians who fear the effects of sanctions.

The Iranian government attempted to fix the rate at 42,000 in April and threatened to crackdown on black market traders. Trade, however, continued due to fears of a prolonged economic crisis and Iranians attempting to store their savings in dollars. Banks, however, refused to sell dollars at the artificially low exchange rate and the government, in June, made it a softer rate, allowing for more flexibility for some importers. The handling of this crisis was one of the reasons central bank chief, Valiollah Seif was replaced after Iranian President Hassan Rouhani’s decision on July 25^th.

A report from July 27^th, as reported by PressTV, states that a shortage of raw materials has tripled the prices of plastic products in Iran, for which traders blame the more expensive US dollar. That, in turn, is encouraging petrochemical suppliers to prefer exports rather than domestic plastics demand.

Mohammad Moqimi-Asl, the head of the Association of Producers of Plastics and Nylon of Iran, as cited by PressTV, said “Providing the raw materials for production of plastics has become extremely difficult than before.” He further accused petrochemical plants of “profiteering” from the country’s current conditions and said they should respect the interests of the state given that “they use huge benefits provided by the government”.

The shortage of petrochemicals, according to Moqimi-Asl, is leading some plastic producers to bankruptcy. This is due to exports being favored as part of a drive to draw more dollars into the country.

On July 29^th, as reported by news Agency Mehr, citing first Deputy head of the judiciary of Iran Golyama Hussein Gholam Hossein Mohseni, at least 29 people were arrested for “undermining the economy” of Iran. According to him, the detainees are charged with a crime, for which the possible sentence is the death penalty. He also added a number of people will be arrested on Monday on similar charges and will soon begin a trial. The names of the arrested people have not been disclosed.

One of the sanctions that are to be imposed by the US are targeting Iranian oil exports, which, as a result, are expected to decrease. In response to the sanctions, on July 4^th, Iranian President Hassan Rouhani threatened to close the Strait of Hormuz, the Persian Gulf’s waterway, through which 30% of the world’s oil supply passes. India has also warned the US that sanctions on Iranian oil exports will have a ripple effect on energy value chain, according to an unnamed official cited by The Business Line.

After the lifting of the sanctions in 2016, after the conclusion of the Iran Nuclear Deal, real gross domestic growth in Iran has been slower than anticipated, as reported by the National. Furthermore, street protests which started on December 27^th, 2017 and lasted until January 3^rd, 2018 over the rising cost of living, high unemployment and alleged state corruption, increasing currency volatility. There were further protests on June 25^th over the collapsing of the rial.

In addition to that, Iran’s Central Bank, in April started applying restrictions on foreign currency transactions in an effort to shut down a flourishing black market and halt the rial’s fall. These factors, however, have caused a decreased in rial-denominated investments and have led to an increase in demand for hard currency, thus worsening the economic situation.