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Economic Consequences of Eliminating the Official Exchange Rate in Iran 

Newly Re-Imposed Sanctions Target ‘Core Areas of Iran’s Economy’

The Iranian regime’s new president, Ebrahim Raisi, introduced a plan to the parliament to remove the official dollar exchange rate of 42,000 rials. According to many of the regime’s economic experts, this is a dangerous decision and would increase the inflation and prices of consumer goods. 

This decision comes at a time when Iran’s economy is at its most “dangerous historical point” in the past four decades, according to Majid-Reza Hariri, the Chairman of the Iran-China Chamber of Commerce, on Friday. 

Iranians suffer from increasing inflation rates and skyrocketing prices. While there are several speculations about the origins of Iran’s economic crises, all clues hint at the regime’s plundering, corruption, and poor economic policies. 

The origins of the “official rate” 

Hassan Rouhani’s government decided to “unify” the free market rate with the official exchange rate. The official exchange rate is 42,000 rials to $1. This official rate was only supposed to be used to import essential goods. Yet, the regime soon recognized other foreign exchange rates as the official rate quickly became inefficient. 

Major protests began in Iran in January 2018 due to the skyrocketing prices. When the United States pulled out of the nuclear deal in May 2018 and reimposed sanctions on Tehran, the dollar exchange rate rapidly increased. 

Rouhani’s government introduced the official exchange rate to prevent the expansion of daily protests and control the market. In March 2017, Eshag Jahangiri announced that the “currency required by all sections” would be provided at the exchange rate of 42,000 rials to $1. This later became known as “Jahangiri’s currency.”  

This official rate was supposed to be used to import the country’s essential materials, most notably food items. Many economic experts recognized this as unofficial subsidies intended to control the prices of essential goods. Yet, the official rate was used by the regime’s insiders to import luxury goods that ordinary Iranians could not afford.  

“In 2019 alone, around $15 billion [based on the official exchange rate] was spent on importing various items,” wrote Fars News Agency on November 7, 2021. “Besides all this fuss, Rouhani’s government was virtually incapable of controlling prices. Surveys show that based on the free-market exchange rate in that year, the importers embezzled around 5.1 quadrillion rials.” 

By giving $15 billion worth of currency, Rouhani increased his government’s already high budget deficit. To compensate for its budget deficit, Tehran has been printing banknotes ever since. Since the resulting increase in liquidity greatly exceeds Iran’s production rate, inflation and prices are skyrocketing. The liquidity surplus also created artificial demand and price increases for many raw materials used by automakers.  

According to Fars News Agency, since Rouhani’s government “had a limited source of currency and was unable to provide importers with sufficient currency, it created the NIMA rate. Thus, finally, it had to resort to banknote printing to compensate for its resulting budget deficit.” 

NIMA is the Persian acronym for an online currency system launched by the regime’s Central Bank. NIMA was created so the regime’s Central Bank could pay for imports of food, medicine, and other essential goods despite the devaluation of the Iranian rial. NIMA’s rate hovered around 170,000 rials to $1. This rate was very close to the free-market exchange rate, which has been varying from 200,000 rials to nearly 300,000 rials for $1. In other words, when the NIMA rate increases, the prices of durable goods increase in parallel, resulting in higher consumer costs. 

The Revolutionary Guards’ Financial Empire

Corruption 

Fixing the dollar exchange rate and having various exchange rates led to corruption in the entire economic cycle, from import to distribution and sales.  

The so-called “private sector,” or rather the front companies of the Revolutionary Guards (IRGC), which were tasked with importing essential consumer goods, used the official exchange rate to profit more. They either imported unnecessary luxury items or increased the ultimate price of the goods at the market. The IRGC has long been operating under the alias of the “private sector” to bypass sanctions.  

In 2019, the international price of each kilogram of sugar was around 30 cents or 12,000 rials, based on Iran’s official exchange rate. According to a chart by the state-run Mehr News Agency in March 2021, even by considering 35% profit, the ultimate price of 1 kg of sugar should have been nearly 20,000 rials. But it was sold for around 74,000 rials at the market.  

According to Professor Hamed Najafi Alamdarlo of Tarbiat Modares University, “Estimates show that from 2018 to September 2021, about $46 billion in foreign exchange resources has been allocated to [importers]” to preserve the official exchange rate of 42,000 rials for $1.  

“Corruption due to this currency is estimated at about 5.9 quadrillion rials. It should be noted that the total development budget for 2021-2022 is about 1.4 quadrillion rials,” he added, according to the state-run Keyhan daily on November 10.   

Why Raisi intends to eliminate the official exchange rate  

During the last year of Rouhani’s administration, the regime intended to eliminate the official exchange rate of 42000 rials for $1. By doing so, Rouhani’s administration estimated that it could earn at least 600 trillion rials. Now, if Raisi suspends or removes the official exchange rate, his government would earn around $2 billion, with the current exchange at a free market rate of 280,000 rials for $1.  

This would not solve Tehran’s problems, as it needs a considerable amount of money to pursue its malign activities. In recent years, the regime has been unable to fully pay its proxy terrorist groups in the Middle East. According to a 2020 U.S. State Department report, the Iranian regime pays $700 million annually to the Lebanese Hezbollah alone.  

It is safe to say that Tehran would not achieve much by removing the official exchange rate, due to the rising devaluation of its national currency and its long to-do list, such as financing its network of terrorism or keeping its clandestine nuclear program. But this action would seriously affect Iran’s declining economy and add to the society’s restiveness. This action could also be described as a painkiller for Iran’s dying economy.   

“Iran’s economy is on a challenging path. The budget deficit and wrong solutions to resolve it would result in more inflation,” wrote the state-run Resalat daily on November 9. “Meanwhile, officials’ economic ideas are creating other challenges. We cannot manage the economy with temporary solutions and just giving orders,” Resalat wrote, adding, “Even if we inject currency to the market to keep the exchange rate low, it will not last long.”  

By removing the official exchange rate, Raisi’s government would increase the country’s economic problems. Raisi claims that by removing the official exchange rate, his government will reduce the current exchange rate from 280,000-to-1 to 175,000-to-1. But in fact, Raisi’s government will be removing the official exchange rate of 42,000 rials for $1 and replacing it with the exchange rate of 175,000 rials to $1.  

Corruption eats Iran’s IRGC from within

According to the state-run Moj News Agency on November 11, “By removing the official exchange rate, the dollar exchange rate would double.” Since importers used the official exchange rate to import essential consumer goods and materials, consumer prices will soar.  

“With the removal of the exchange rate of 42,000 rials, the cost of importing wheat will increase. In this case, a heavy subsidy must be paid to the bakers. Otherwise, we must accept a sharp increase in the price of bread,” said Abdolnasser Hemmati, the former Central Bank Chief, according to the state-run Tejarat News on November 10.  

“The removal of the exchange rate of 42,000 rials for $1 will increase the prices of medications. This would be devastating for those who regularly use medications. They should auction their entire belongings to purchase medications,” said Bahram Eynollahi, the regime’s current Health Minister, according to the state-run Entekhbat news agency on November 9.  

“We must note that some items are related to people’s daily lives, nutrition, and livelihood. For this reason, the official exchange rate was used to import these essential goods to be available to the people at a reasonable price. But if it is eliminated, the price of basic goods will multiply,” the state-run ILNA News Agency wrote on November 13.  

“We once experienced [the negative impacts of] currency shocks in 2018 and 2019, when Rouhani’s government increased the fuel prices to compensate its budget deficit,” wrote the state-run Farhikhtegan daily on November 14, warning Raisi’s government of another uprising on the scale of the major protests in 2018 and 2019. “Raisi’s government should learn from the past, and it should not try to compensate for its budget deficit that has been caused by currency shock through another currency shock.”  

It is safe to say that the Iranian regime is in a severe economic deadlock. It seriously needs money to pursue its malign activities such as supporting terrorism and building a nuclear weapon which it considers vital to preserving its isolated rule. The only solution Raisi has is putting his hands deeper in people’s pockets. But doing so would increase society’s restiveness. Soon, people who have nothing to lose would come on the streets, and the regime knows this would end its 40 years of corruption and oppression. Therefore, the regime is shooting itself in the leg.