Iran’s Rial—A Sequel

The Islamic Republic’s lingering currency crisis, the rial value’s continued daily fluctuations in the free market, and the rudderless management of the exchange rate by the Central Bank have given rise to some onerous predictions. The rial itself has been declared “on its death throes.” Iran’s economy has been portrayed as edging towards total  “collapse.” The Tehran Stock Exchange’s current “bubble” is seen near burst. The theocratic regime’s hold on power is said to be threatened by the devastating effects of the current crippling sanctions. On careful scrutiny, none of these predictions seems to be a distinct possibility.

First, the rial’s sixty five percent value loss in the last few months has indeed been unprecedented and highly disturbing. Yet, in comparison with some historical cases (e.g., Weimar Republic, 1923; Yugoslavia, 1992-94; Turkey, 1997; and most spectacularly Zimbabwe, 2006-08), the rial has a long, long way to go. The lowest ever quoted rate for the Iranian currency in the small and unrepresentative free market has been $1=Rls 40,000.Yet this rate is only slightly more than the rial’s true value if it had been properly adjusted for inter country inflation differentials since the 1979 revolution. The rial is neither dead nor dying. With fewer zeroes (and perhaps a new name) is destined to regain its previous position before long.

Second, the Iranian economy is certainly in a bind now. Several years of gross and inexcusable mismanagement, coupled with the increasing impact of ever-tightening economic sanctions, have wreaked havoc with the fragile case. Gross domestic product is expected by the IMF to shrink by 0.9 percent this year– for the first time since the mid 1990s. Inflation is officially reported to be 24 percent now, but expected to reach 40 percent by the year’s end. Unemployment is officially put at mid teens, but privately estimated to be in upper twenties. Industry is plagued with low  capacity operation (due to shortages of raw materials), mounting debts, unpaid workers, and labor strikes. Substantial declines in oil production and exports are threatening exchange reserves and budget revenues. The current co-existence of four different exchange rates is inefficient, clumsy, and graft-ridden. Frequent reshufflings of import items eligible for buying dollars at different rates, the unsettled exchange rate for non-oil exporters’ dollars, and ceaseless complaints by importers about delays, discriminations, and uncertainties about the future add to the crisis. Yet the economy’s capacity for survival is still enormous. Even if the widely reported $ 40-45 billion loss of oil export receipts this year should materialize, the economy can muddle through with some tolerable pain. Due to much higher oil prices, the Islamic Republic is estimated to earn more than $50 billion in oil revenue in 2012. Added to some $20-25 billion annual non-oil exports, the total could easily pay for the country’s essential import requirements with no need to tap currency reserves. During the 1997-2004 period, Iran had far less annual imports, and experienced far more GDP growth, compared with the 2005-2012 figures. Once such imports as luxury-class German cars, modern Italian furniture, fancy electronic gears from Japan and South Korea, toys and trinkets from China, exotic fruits from the tropics, and designers’ clothes from European fashion houses are eliminated, trade sanity would again be

Third, a possible burst of bubble in the Tehran Stock Exchange has no earth-shaking significance. This has happened before (last time in 2008) and may happen again. The TSE–with less than 340 listed companies, a total market capitalization of Rls. 1,360 trillion (or about $110 billion at the highly overvalued official exchange rate) plays a small role in the economy. It is highly opaque, insufficiently liquid, and widely regarded by retail investors as controlled by some 50 corporations. Its boast about reaching a record high of 29,992 for the first time in its 46 year history (on October 20, 2012), is simply caused by the four hundred percent rise in liquidity during the last seven years— seeking refuge from growing inflation. The late October rally is also due to rising demands for the shares of exports-oriented companies expected to benefit from the low rial value.

Finally, the chances of the theocratic regime being toppled by civil turmoil resulting from austerity measures are least credible. There is no doubt that despite repeated disclaimers by the “sanctioneers,” American and European sanctions on Iran’s oil exports, shipping, and banking have profoundly affected the daily lives of ordinary citizens in their quest for food, medicine, recreation, and travel. Yet the chances of serious public uprisings threatening the regime’s survival are low for two basic reasons.First, more than thirty years of dealing with domestic opposition (e.g., Mojahedeen-e-Khalq, Tudeh agitators, the Freedom Movement, and lately, the
Greens) has taught the anti-riots forces how best to control the crowds.And second, peaceful protestors’ harsh and beastly treatments in the hands of the same brutal forces (arrest, beating, incarceration, torture, and even death) have scared them enough not to go beyond certain red lines. The recent October 18-19, 2012 maneuver by some 15,000 pasdars in east Tehran–dubbed a preparation drill to deal with “city disturbances” has been a reminder to potential agitators—if there ever was a need for one.

The possibility of the regime’s disintegration as a result of sanctions is also almost nil. The current theocratic government in Iran may fall as a result of a sudden political vacuum at the top, a military coup by some young pasdar officers, a foreign invasion with boots on the ground, or some unforeseen other causes. But it will not disintegrate under the weight of sanctions– for a simple and almost elementary reason: Those who have invoked and invited sanctions by their policy decision, action, and unflinching behavior are perfectly capable of changing gears, and ending the penalties.

Unless one subscribes to the preposterous theory of “suicidal mullahs,” it would be counterintuitive to think that the theocratic oligarchs in Tehran, facing existential threat to their survival, would still cling to their uncompromising position. There is no doubt that once the external economic, electronic, or military pressures reach the intolerable point—once “the knife touches the bone,” in the mullahs’ own vocabulary—Tehran’s position vis-à-vis the 5+1 group will drastically change. The theocratic oligarchs are their own rescue squad. The key to their salvation is in their own pocket.

Courtesy Jahangir Amuzegar