Grave "fate" of Iranian rial

Grave "fate" of Iranian rial

Azerbaijan, Baku, June 13 / Trend /

Ellada Khankishiyeva, Trend Analytical Centre Head

International sanctions against Iran undermined the financial stability in the country where the the main blow fell on the national currency - rial. Rial depreciated rapidly amid appreciation of the dollar, and because of the inflation growth rate in Iran. At present, one dollar is traded for 18,220 rials at Iranian open foreign exchange market.

The official rate of rial compared to the U.S. currency has fallen sharply (by 7.8 percent) in late January 2012 and is kept constant at 12,260 rials per dollar today. The first sharp decline in official exchange rate of the rial was in 2002 when the dollar in the country increased from 1,755 rials to 7,925 rials per dollar. It was in that year that the United States declared Iran as part of "axis of evil" and was doomed to economic isolation.

There are many reasons for the depreciation of rial, even in spite of the efforts of the Iranian government to make rial a pay unit in trade relations. Comprehensive sanctions have led to a decrease in foreign exchange reserves, in particular the dollar, and this shook the position of the national currency and it is possible that this will lead to further devaluation of the Iranian rial.

On the other hand, inflation at 22.2 per cent reduces the purchasing power of the rial. In turn, the drop in real purchasing power of population leads to distrust of own currency, forcing Iranians to get rid of the rial, to withdraw deposits from banks in national currency and stock up on dollars. It also triggers increased demand for U.S. dollar.

Plans for the Iranian rial's denomination will have no effect on either inflation or the devaluation. Denomination is an objective need: it is necessary to strengthen the rial and to simplify the calculations, but it is a purely technical procedure in which only the zeros will be lopped off. On the contrary, the uncertainty that arises in anticipation of the denomination, always gives rise to inflationary expectations among the population, as well as the craving for the storage of foreign currency hoping to go through troubled times.

According to economic theory, a positive consequence of the national currency's devaluation is the stimulation of exports because when exchanging gained foreign currency to depreciated currency an exporter receives devaluation income. However, in terms of stimulating exports, we can speak about Iran's main export commodity of oil, which is subject to bans.

Barter transactions, to which Iran was forced to move in its trade relations, increased the cost of trading for Iran, and led to higher prices of imported goods and, most importantly, excluded the Iranian rial from such an important economic process, as the foreign trade turnover.

The second positive consequence for the country of currency devaluation, economists believe increased competitiveness of the national economy. But here is just shag to it. This is only possible.

if the devaluation is combined with restrictive monetary and income policies and structural reforms that Iran currently is unable to implement.

In this situation, it's possible only to predict further depreciation of the Iranian rial.

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