Sunday, June 12, 2011

Iran Currency Sliding

The Iranian currency rial continued its slide against dollar today, hitting a record low of 12,220 rials per dollar. Last Wednesday, the Central Bank of Iran (CBI) officially devaluated the currency by 11% to 11,710 rials per dollar. But the move did not stop rial’s fall in free markets, and just during the last three days the currency has lost another 4% in value.

On Saturday, the Federation of Industries, a trade group representing the Iranian industry, issued strong warnings against currency devaluation. In an open letter to President Ahmadinejad, the group said the 11% fall in rial’s value is causing the prices for raw material which are heavily imported to rise at least at the same rate, causing a corresponding rise in the prices of finished consumer goods.


ih said...

What does it mean to the average citizen?

Nader Uskowi said...

Iran is heavily dependent on the import of raw materials made in foreign countries to run its industry. When CBI raises the official exchange rate by 11%, that means the local producers of consumer goods need in effect to pay 11% higher to purchase same raw materials, and they are expected to pass along that increase to their customers, so the prices for those goods will be increased by at least 11%. In other words, the devaluation could be inflationary and would affect the average consumer.

The irony here is the devaluation will not affect the bulk of Iran's exports. Normally you expect that cheaper rial would translate to lower-price exports, and a corresponding increase in the volume of exports. But because crude oil contracts are based on dollar, and not rial, the devaluation of currency would not affect that item which comprises the greatest part of the country's exports.

Anonymous said...

US dollar this news?

Anonymous said...

A Swedish Tycoon once said:
Devaluation of a currency is like wetting your pants. It feels warm and nice to begin with .....
I don't see the usual defenders of the Islamic republic on this blog blaming it on the Zionist !

Anonymous said...

It will make Iranian labor cheaper, in dollar terms, which will incentivize the hiring of Iranians on the global market (or at least help slow down the exporting of Iranian jobs to China). This is why countries generally devalue currencies, to protect their labor markets. Another byproduct is an effective transfer of wealth from rich to poor. For some reason when Israel did this, the head of their central bank Fisher was praised, where as when Iran does it they are attacked. I say "for some reason" facetiously of course.

Anonymous said...

Nader, what foreign raw materials is Iran heavily dependent on?

You guys do know that people in Iran's central bank actually support devalueing the currency right?

This is what a devalued currency means for Iran:

Foreign goods become more expensive, therefore domestic goods have an increased demand. This increases domestic output, increasing the GDP.

Domestic goods become cheaper for foreign countries to buy, therefore out non oil and gas exports (like cars) increase.

Another important effect: the Iranian government has in effect a lot more money. The Iranian government recieves foreign currency for its oil and gas exports. For the same ammount of forreign currency, the Iranian government can now buy more rials, thus in effect increasing government revenues.

In reality, a decreased currency for an import substitute economy such as Iran's, is not a bad thing.

Nader Uskowi said...

Anon 8:24 PM,

What we said here was that Iran had devaluated the currency by 11%, and the trade group representing the country's industrial production plants were issued warnings that the devaluation would raise their imported raw materials by at least that amount and they need to pass along the increases to consumers, an inflationary move.

I do agree with their analysis that the move is inflationary. I also believe cheaper currency does not same effect on export increase in Iran, because the main export, the oil, is priced on dollar. However, like many other economic moves, the devaluation will have positive effects as well: decreasing demands for foreign imports and increasing demands for non-oil exports. We need to balance these two sets of effects to see if the move was a right one at this one.

But on the whole, I accept your analysis. The country is better off if it had one single exchange rate. Two-tier or multi-tier exchange rates creates inefficiencies in the economy. The reality is the rial is way overvalued and devaluations will help maintain an official rate as close to the real value as possible. In that sense, the CBI needs to do more devaluations in near future, and they might just do that,

Thanks for your comments.

Anonymous said...

I know, but i would like to know what those imported materials are because i don't think they would be something that could not be made if the correct resources are invested.

A strong currency would make it cheaper to import these materials and now weakening the currency would make it profitable to invest the correct resources in making those materials domestically.

I can't imagine what Iran needs to import in such large numbers that a devaluation is problematic.

Things that are really high tech and have to be imported are usually imported by the government anyway, which has a lot of forex reserves which are not effected by the value of the rial

So whilst it may be inflationary in the short term, it certainly will not be in the long term.

But as i said above, i do not think there are any materials that are bought in large numbers by companies using the rial (i.e. public companies) that it would be inflationary. There materials probably have domestic substitutes, so what we might see is a switch to those instead. Now whether they are more expensive or of lesser quality than their foreign counters parts, i cannot say however this substitution effect is nothing but beneficial for Iran in the long term.

The inefficiencies in the market from having a two tier system are the price that Iran has to pay at the moment. Having a single tier system would not be wise in the current situation Iran finds itself in.

I agree that there needs to be a