Iran’s currency woes: how damaging for the regime?

'A fistful of Rials'

The value of Iranian rials. Photo Credit: Flickr Creative Commons/Scarto

By Dina Esfandiary, Research Associate and Project Coordinator, Non-Proliferation and Disarmament Programme

Protests erupted in Tehran on Wednesday after Iran’s currency, the rial, lost about 60% of its value over just eight days. Although the protests are unlikely to be the ‘beginning of the end’ for the Iranian regime, they demonstrate that discontent is rife, and will put the government on edge in the run-up to the 2013 presidential elections.

The currency crisis

The rial’s downward trend is not new: the currency fell gradually from 10,000 rials to the dollar in November 2011 to 16,000 rials to the dollar over the summer. But in the past week it has taken an abrupt turn for the worse, dropping to 37,500 rials to the dollar on Tuesday. The exchange rate had improved to 32,000 rials to the dollar by Thursday, but the crisis, which President Ahmadinejad blames on a ‘foreign conspiracy’, shows few signs of abating.

While the currency crisis is widely attributed to the economic sanctions imposed to halt Iran’s nuclear ambitions, they are not the whole story. Sanctions have certainly contributed to the rial’s devaluation by weakening the economy and cutting off Iran’s access to the international financial system, making it difficult for Iran to sell its oil – the main source of government income and foreign-exchange reserves. But the rial’s plunge is also the result of a crisis of confidence in the government’s handling of the economy, which has been mismanaged for years. President Mahmoud Ahmadinejad’s subsidy-reform plan was aimed at redressing structural inconsistencies, but the plan’s poor implementation led to hyperinflation and higher unemployment.

The government’s response to the economic crisis has been meek at best. Panic has set in, with Iranians exchanging their rials for dollars (or any other hard currency) on the black market, or buying gold. This has prompted a further fall in the rial’s value, with an increase in the price of imports and resulting inflation. The opaqueness of the country’s economic administration has not helped the situation.

Things came to a head when the government tried to address the currency crisis. In an attempt to remedy the rial’s volatility and curb black market trading, Iran’s Central Bank opened a new ‘foreign exchange centre’ on 24 September offering better rates for importers of essential goods such as food and medicine. This sparked a wave of panic: ‘Nobody wants to be the last one stuck holding rials – just like nobody wants to be the last one out the door during a bank run – so they dump rials for whatever they think will be a better store of value,’ Matthew O’Brien explained in the Atlantic. The government could attempt to remedy the situation by flooding the market with dollars to increase supply and drive prices down, but this would limit its access to the foreign-currency reserves – severely reducing its financial resources and preventing it from addressing issues such as the budget deficit.

Iranians no longer have confidence in their government’s ability or will to manage the economic crisis. This is compounded by the sense that the nuclear issue is unlikely to be resolved any time soon. All in all, the outlook is grim. But the real question is whether the economic crisis is dangerous for the regime.

Protests in Tehran

The subsequent protests that erupted in Tehran on Wednesday are a signal that the tide of public opinion might be turning against the regime. At the moment, the government still has enough foreign reserves to stave off disaster for over a year; the plunge in the value of the rial is therefore not lethal. But the crisis is likely to continue, with the average Iranian bearing the brunt of it; as one woman complained, ‘prices are going up every single minute’. Many Iranians are blaming the government and are questioning whether the nuclear programme is really worth the economic isolation. That said, some will blame the West for imposing harsh sanctions in response to what they view as a legitimate nuclear programme. Sanctions often polarise opinions and Iran is no exception.

It is also significant that the protests started in Tehran’s Grand Bazaar. Bazaar merchants (‘bazaaris’) supported the 1979 Islamic revolution, and the economic and political benefits they attained after the Islamic revolution ensured, until a few years ago, their loyalty to the regime and to the status quo. But the government’s economic failure has displeased them too. In 2008 and again in 2010, bazaaris went on strike to protest new taxes. Their reported participation in the latest protests is significant. Although the bazaar’s union re-iterated its support for the regime on Thursday, it also highlighted discontent over ‘the performance of the administration in the economic sphere’.

The regime responded swiftly and decisively to the protest. Riot police quickly dispersed crowds and numerous arrests were made. This response demonstrated that the regime will not tolerate any dissent in the run-up to the June 2013 elections. While the protests do reveal some significant developments in Iran’s internal tensions, their actual effect should not, for now, be overstated. The opposition is still unable to organise itself in the way it managed to do following the 2009 elections.

But judging by the rising discontent, such gatherings could happen again and increase in both size and impact – turning up the pressure on the Islamic regime. This reality, coupled with the economic crisis, will put Ahmadinejad’s government under huge strain. The Supreme Leader, Ayatollah Khamenei, is also making things difficult for Ahmadinejad by allowing organisations like the bazaar union to openly criticise him.

But for all these challenges, the regime has signalled that it is prepared to combat dissent in what promises to be some tumultuous months ahead.


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