Currency devaluation against US dollar rattles Iran

Central bank announces new monetary measures to halt drop of rial, as authorities crack down on black-market exchange.

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    Tehran, Iran - Iran has introduced new monetary measures to halt the devaluation of the country's currency, a move seen as a setback to President Hassan Rouhani's efforts to bring investment and create more jobs following a 2015 nuclear deal.

    The rial has been on a downward spiral, falling to an all-time low against the US dollar on Wednesday, when it traded for 50,000 rials, 30 percent higher than its value in August 2017.

    But the rial posted a slight rebound later in the day, when police arrested black-market currency dealers, shut down a number of exchange offices and blocked hundreds of bank accounts owned by major currency traders, local media reported.

    According to the Arman-e Emrooz newspaper, 755 bank accounts were also blocked as part of the police operation. 

    For many Iranians, the dollar-to-rial exchange rate is an indicator of the country's overall economic climate.

    In response to the plunge, the Central Bank of Iran (CBI) announced plans for the presale of gold coins and sales of Certificates of Deposit (CDs) with an interest rate of 20 percent for a one-year term.

    The measures were meant to deter speculators from continuing to bet against the rial as they had been doing over the past months, which accelerated the currency's drop in value.

    Economic woes

    High levels of non-performing loans, coupled with the government's inability to pump cash into the economy amid a drop in the price of oil, have strained Iran's economy.

    The central bank has tried to contain the financial crisis, however, through structural reforms.

    "The central bank used to issue the CDs at a rate of 16-17 percent. Now it will increase it to 20 percent, with the aim of creating financial stability," Pouya Jabal-Ameli, a CBI analyst, told Al Jazeera.

    Over the past year, despite resistance by the banking sector, the central bank has also tried to reduce interest rates on deposits from more than 20 percent to 15 percent.

    The move is aimed at encouraging Iranians to withdraw their money from banks and invest it in small- and medium-sized businesses - to help fight against a slump in the industry as well as boost employment.

    However, with the devaluation of the rial and the gaining of US dollar, cash stays primarily in the currency market instead of being invested in job creation. Buying foreign money is a type of investment for many Iranians - and the more the US dollar gains, the more demand increases, resulting in less investment in businesses.

    The official unemployment rate stood at 11.7 percent in the summer of 2017, according to the Statistical Center of Iran. But the Iranian parliament's research agency puts the unofficial unemployment rate as high as 22.6 percent.  

    Joblessness was one of the contributing factors to widespread protests, which erupted in late December and continued for days, spreading to dozens of cities across Iran.

    Some 5,000 people were detained, and 21 died in the unrest.

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    The protests were ignited shortly after Rouhani submitted a budget bill for the new year to the parliament, proposing a 50 percent increase in the price of fuel, as well as a review on the number of households receiving monthly cash subsidies.

    But after the unrest, the administration backed down from those decisions.

    Rouhani won re-election in May 2017 in a landslide win built on his success at stabilising the economy and having crippling international sanctions lifted.

    Iranians have been pinning their hopes on the historic nuclear deal - reached between Iran and world powers three years ago - to bring about foreign investment and jobs, but the deal has not been able to do wonders.

    Trump factor

    Despite the UN-backed international accord, also known as the Joint Comprehensive Plan of Action, or JCPOA, foreign cash has been coming into Iran at a much slower pace than expected.

    US President Donald Trump has repeatedly criticised and threatened to pull out of the deal.

    The US' hardline stance has been another cause for the rial’s depreciation, according to Stratfor, a US-based intelligence platform.

    "[JCPOA's] current limbo means that the speculative risk surrounding the rial won't disappear soon," the group wrote.

    The recent currency devaluation raises the spectre of a further rise in prices of commodities and consumer products amid growing popular discontent.

    Also, despite assurances from the central bank that it will contain the turmoil, currency fluctuations often push inflation rates up with a time lag.

    However, "the recent fluctuation has not had an effect on [the] inflation rate as yet", Jabal-Ameli said.

    "If the central bank is able to control the market and bring back the stability in the coming weeks, the price index will not be affected considerably."

    Asked if he thinks exchange rates will control the plummeting rial, he added: "I'm positive the new central bank package will work."

    SOURCE: Al Jazeera News


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