Source:

October 4, 2010

Doubts about Iran’s long-term economic prospects have intensified amid a slump in the value of the national currency, the rial, against the U.S. dollar.

With the economy already straining under the effect of international sanctions, the rial declined 13 percent against the dollar last week as demand for the U.S. currency soared among businessmen and ordinary people. On September 29, the rial was 12,500 to the dollar; a week earlier, a dollar was worth 10,500 rials.

Some currency traders in Tehran reportedly stopped selling dollars in the face of long lines gathering to buy them.

The retail exchange rate was reportedly 10,900 rials to the dollar today — higher than the 10,700 rials the Central Bank of Iran said a dollar would buy.

The Central Bank’s governor, Mahmoud Bahmani, pledged on September 30 that the rial would return to what he termed a “normal” level of 10,600 to the dollar this week. He urged Iranians not to flee the rial to buy foreign currencies or gold, insisting that the bank was not facing a hard-currency shortage.

The rising dollar triggered a spate of dramatic newspaper headlines reflecting renewed speculation about the state of the economy. “The rise in the currency rate is representative of economic tensions,” read one headline in the “Siyasat-e Rouz” newspaper, a conservative daily.

Questions Abound

One currency trader, Mehdi Tajik, said some businesses had closed their doors because of currency fluctuations.

“The bazaar was closed for about a week having been hit with fluctuations. That is why we couldn’t trade at all,” Tajik said. “Many businesses have now stopped trading until the prices stabilize. The prices are unstable now.”

Some traders have blamed the government for failing to stabilize the exchange rate. One Tehran resident, Javad, told Reuters he thought the government had deliberately raised the price of the dollar.

“The fluctuations in the U.S. dollar and in foreign exchange are in the hands of the government,” Javad said. “The government has contrived this situation to raise foreign exchange prices.”

Another resident, 49-year-old Amir, told Reuters that the plunging rial raised serious questions about Iran’s economy.

“Not only Iranians, but any community would be upset to see frequent changes and instability in foreign exchange in relation to their country and its economy,” Amir said.

‘Safe Haven’

Iranian banks have been targeted in sanctions by the UN Security Council, the U.S. Congress, and the European Union — all in an effort to persuade Iran to curb its nuclear program. Many in the West suspect the program is aimed at producing a bomb, but Iran insists it is peaceful.

Mehrdad Emadi, a London-based economic consultant, said the dollar has risen as Iranians have sought to buy it as a “safe haven” currency because of fears about Iran’s economic future. He warned that the recent runs on the rial could herald the first of a series of currency crises as confidence in Iran’s economy evaporates.

“Currency markets are the most sensitive markets in picking up signs about confidence in the markets of people, of foreign investors, about the state of the economy,” Emadi said. “And the rush we saw in the last three weeks — the purchase of foreign currencies, of dollars, euros etc. — was basically a vote of no confidence of ordinary people and traders in the rial, in the national currency — that they really do not believe that the government has the means or the competence to support the value of the currency at what they have pegged it.”

written by Robert Tait based on RFE/RL and additional agency reporting