A man pays using Iranian rials at a shop in Tehran on July 31, 2019. Photo: AFP / Atta Kenare

RASHT – As the United States seeks to ramp up economic pressure on Iran via renewed economic sanctions, the nation’s already slipping currency, the rial, has gone into a virtual free fall.

New reports suggest that Iran’s rial has lost at least 49% of its value so far in 2020, a devastating collapse of the local unit. As such, the rial is now effectively one of the most worthless currencies in the world, inferior even to the Iraqi dinar and Pakistani rupee.

As of September 24, the rial traded on unofficial markets at 277,900 to the US greenback while the official rate was 42,276. In July, the government approved plans to remove zeroes from the currency to ease making transactions, something locals have long done.

The depreciation has predictably unleashed a wave of hyperinflation, seen and felt in a recent steep rise in the prices of consumer goods, real estate and automobiles. The Statistical Center of Iran (SCI) reported that inflation for urban households hit a whopping 26.1% in September, while the annual inflation rate to date has topped 34.4%.

Earlier in August, the SCI raised alarms by reporting that the average prices of basic foodstuffs, drinking water, beverages and tobacco increased by 25.8% in the 12-month period ending August 21.

The International Monetary Fund (IMF) projects that Iran’s gross domestic product (GDP) will contract by 6% while unemployment hits 16.3% in 2020.

FocusEconomics, an independent economic forecasting outfit, predicts Iran’s GDP will contract by 8% this year. The Economist Intelligence Unit (EIU) projects Iran’s real GDP will collapse 12% while adding that the authorities’ belated response “will also fuel popular anger and a humanitarian crisis.”

As the Iranian economy nosedives into recession, exacerbated by the coronavirus pandemic, external pressures and the failures of government agencies to regulate consumer demand and supply chains have Iranians rushing to convert their rials into gold, US dollars and real estate.

An unofficial currency trader in Tehran. Photo: AFP via Anadolu Agency/Fatemeh Bahrami

Iran’s gold market, like the foreign exchange and real estate markets, is on tenterhooks. A piece of gold coin, weighing 8.13 grams, is valued at 133 million rials (US$464). At the beginning of May, a gold coin was worth 64 million rials, meaning it has almost doubled in value in just four months.

Most observers attribute the trials and tribulations of the Islamic Republic’s economy to America’s unsparing economic sanctions. Yet those in Iran’s business sector say the sanctions are not the only reason the rial is plummeting and inflation ballooning.

Nasim Tavakol, an Iranian entrepreneur and CEO of the Arsh Gostar e-commerce company, says it is unreasonable to blame only sanctions for Iran’s economic and financial woes.

“As someone active in the country’s economic environment, I can observe instances of mismanagement and at times the government stonewalling the activities of the private sector,” she said.

“In recent months, there have been difficulties in the allocation of foreign currency by the Central Bank of Iran while the process of the clearance of goods has been made unsteady by the customs administration,” she told Asia Times.

“The prolongation of the processing of orders registration and getting permission for the allocation of foreign currency has caused us great damage, which is way larger than the damage resulting from the increase in the price of foreign currency,” she said.

Companies importing goods from overseas need to obtain certain permissions from the Central Bank of Iran so that they can buy foreign currency at official rates lower than open market prices. The bureaucratic red tape involved in issuing those permits, however, is causing heavy losses to importers.

Maryam Shokrani, a prominent economic journalist and commentator in Tehran, agrees that while sanctions have taken a toll on the Iranian economy, there are a myriad of factors behind the current crisis.

“War-stricken countries such as Iraq and Afghanistan have been able to achieve single-digit inflation rates. Despite sanctions, Russia has been able to manage just single-digit inflation. Syria, entrapped in a civil war, is not the world’s frontrunner in inflation rate, but this predicament has befallen Iran,” she said.

“This is the ineffectiveness of monetary and fiscal policies in Iran throughout the years. Iran’s economy has been oil-dependent for decades, and the budget deficit is made up for by printing money, resulting in a double-digit inflation economy and challenges associated with it,” Shokrani told Asia Times.

A financial board in exchange office shows the US dollar broke the historical record above 20 thousand levels in Tehran, Iran on June 23, 2020. Photo: AFP via Anadolu Agency/Fatemeh Bahrami

She argued that Iran is not paying enough attention to production, industries and creating jobs, leaving families unable to balance their revenues and expenditures and is thus driving more and more Iranians into poverty.

There are currently little to no meaningful financial, banking, insurance and transportation ties between Iran and the international community, the upshot of US President Donald Trump pulling the US out of the previous Iran nuclear deal (JCPOA) in May 2018 and imposing punitive sanctions against Iran afterward.

The US has since pressured other countries against doing business with Iran, with the potential of being targeted by secondary sanctions for non-compliance.

Fearing the penalties, Iran’s traditional oil clients in Asia including India, Japan, South Korea and Taiwan, EU buyers like France, Germany, Greece, Italy and Spain, and even Iran’s cordial neighbor Turkey, have all halted their Iranian petroleum imports.

That said, as the US keeps the pressure on Iran and its partners, there is still some limited trade in agricultural products, food, medicine and industrial machinery. Iran’s oil ministry has also reportedly resorted to workarounds to smuggle small amounts of petroleum to China.

In the first four months of 2020, the value of trade between Iran and 27 EU member states stood at 1.47 billion euros (US$1.7 billion), with Germany, Italy, the Netherlands and France as Iran’s biggest trade partners. Iran also manages to export goods to some neighboring countries in Central Asia and Russia, one of its strategic allies.

But even these meager deals, insufficient by any measure to sustain a country of some 80 million people, have come under increased scrutiny after the Financial Action Task Force (FATC), an intergovernmental, anti-money laundering body headquartered in Paris, placed Iran on its blacklist of money-laundering and terrorism-financing syndicates in February.

After Iran’s failure to ratify the United Nations Convention against Transnational Organized Crime, also known as the Palermo Convention, and the International Convention for the Suppression of the Financing of Terrorism, FATF called on its member states to apply due diligence and countermeasures in their financial transactions with Iran and its banking institutions.

Iran is now considered by FATF as a “high-risk jurisdiction subject to call for action.” The only other global country on the list is North Korea. This has made Iran’s few allies, including Russia and China, reluctant to engage in banking transactions with Iran, multiplying the costs of dealing with the increasingly isolated economy.

The Islamic republic’s President Hassan Rouhani chairing a cabinet meeting in Tehran on January 15, 2020. Photo: AFP

Shokrani, for one, believes the Iranian economy needs drastic “surgery” to reverse its flagging fortunes.

However, she, like others, believes President Hassan Rouhani lacks the drive to implement tough reforms. At the same time, his government has been reluctant to intervene by putting pressure on manufacturers to ease consumer prices, due to fears it would push more small and medium enterprises into bankruptcy.

“The supply and demand regime has been upended and the costs of production have spiked maddeningly…if the government applies further pressure on the companies, we will witness the closure of firms and flight of capital from Iran,” she said.

That’s not how the government sees it, however. In August, Rouhani praised his administration’s economic performance, saying Iran has “proven more resilient” than the US and European countries where he said without citing his sources that GDP had declined 30% and 10% respectively.

Cyrus Bina, a distinguished research professor of economics and management at the University of Minnesota, Morris, said that he is not optimistic about the prospects for economic rehabilitation given the prevailing attitudes of the government and vulnerability of elected officials.

“The quandary for the Iranian economy is that it is additionally sitting between a rock and a nasty place, namely between gross mismanagement of the economy by both conservatives and reformists, and mindless US sanctions,” Bina said. There is now “virtually no elbowroom to wiggle,” he said.

“The Islamic Republic is so deeply entrenched in multiple economic, political and legitimacy crises that a modest fiscal policy against the present currency crisis is too little and too late,” he added.

Authorities in Tehran are clearly hopeful that Trump will be unseated by his Democratic Party rival Joe Biden at the November 3 polls. The apparent hope is that Biden, who served as vice president when JCPOA was enacted, will reverse Trump’s sanctions and restore the deal.  

Iran’s Foreign Minister Javad Zarif, however, told the Council on Foreign Relations in a virtual meeting earlier this week that the choice of US president is “none of Iran’s business,” and what matters to the Islamic Republic is the broad behavior of the US government.

He also claimed the US should compensate Iran for the economic losses incurred after the US’ withdrawal from the JCPOA – an unlikely payout even if Biden trumps Trump at the polls. But unless a new deal is reached, Iranians should brace for more spiraling inflation, rial depreciation and more hard economic times ahead.