How rial’s devaluation may boost Iranian economy

Al-Monitor | : The money supply in the Iranian economy exceeds $355 billion at the official exchange rate, remarkably surpassing total economic output of $331 billion. Financial depth, a metric showing the ratio of liquidity to gross domestic product, is commonly indicative of the state of a given economy. But financial depth can be too high; the rapid growth of this ratio in Iran, which has seen it tripleunder the administration of President Hassan Rouhani, is now posing a threat to the overall economic health of the country.

Weak monetary, fiscal and exchange rate policies in recent years coupled with the payment of high interest rates to Iranian bank depositors have all acted to cause the liquidity rate to spike to levels that have spurred dramatic growth in asset markets such as hard currency, gold coins and real estate. Iranian stock exchanges have been the only markets that have been neglected by investors, even as the fundamentals in the Tehran Stock Exchange tell of rosy days to come.

The interest rate cut by the Central Bank of Iran in September amid President Donald Trump’s repeated threats to withdraw from the nuclear deal — which he effectuated May 8 — are among the catalysts that contributed to further turbulence in the foreign exchange and gold coin markets in Iran.

But as gold coin prices keep hitting new highs, experts say valuations are deviating deeply away from intrinsic values and thus indicating the formation of a bubble. For instance, the US dollar exchange rate, which is commonly applied to calculate the value of gold coins, is priced at a premium far above the rate of the greenback on the now blacklisted “free” market. While the US dollar trades for around 71,000 rials in the unofficial market, gold coins are sold for around 25 million rials. In this valuation, the dollar is calculated at a rate of 75,000 rials. This amounts to $352 at the first rate, and $333 at the second, but $565 at the official rate. This shows that investors have turned to the gold market as a safe haven to preserve the value of their money in the absence of a functioning “free” foreign exchange market due to severe penalties imposed by the authorities on both sellers and buyers.

Read more here