Six factors driving Iran’s sudden currency devaluation

Al-Monitor | : A major and unexpected devaluation of the rial on the free currency market has taken many in Iran by surprise. Analysis of the behavior patterns in the Iranian foreign exchange market suggests that six main parameters need to be assessed to understand what has contributed to recent events.

First is the application of the inflation differential between Iran and the global inflation levels. This factor has previously been discussed by Al-Monitor, and there have been strong signs that the Rouhani administration has sought to maintain a degree of stability in order to contain the inflationary impacts of a devaluation.

If one would have applied the inflation differential, the free market rate of the US dollar would have been around 48,000 rials in October 2016, meaning it would have theoretically far surpassed 50,000 rials by now. Based on statements by top officials, the Central Bank of Iran (CBI) and the administration remain committed to managing the value of the national currency. However, there is continued inflationary pressure on the rial, especially as Iranian exporters wish to see a weaker currency that makes their products more competitive. The ongoing ambiguity surrounding exchange rate policies, and especially the guessing game about the long-promised unification of the official and free market rates, continue to unsettle the market, which enters into panic mode whenever there are sudden fluctuations.

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