Iranian currency, Toman -consisting of ten Rials- was exchanged for dollar at a rate of seven Tomans to a Dollar during a long period under the Shah’s reign. However, whether it was a trade-balancing rate, was open to question because the main item of Iranian export consisted of depletable oil and the currency earned was used to finance industrialization. Therefore, the country had adopted a policy of keeping the imported capital goods cheaper for the emerging industries. Hence, the country’s opting for a system of pegged float managing the exchange-rate fluctuations within the desired range. The rapid industrialization was underway between 1963-78 and the country experienced an average growth of above 10% for longer than a decade.

The quadrupling of oil price in 1974 opened the floodgate of dollars that could not run in the narrow veins of national economy due to meagre infra structure, which faced with colossal imports,  kneeled  down with “bottlenecks” and this, combined with political dissent, paved the way for the revolt in 1979 -later dubbed The Islamic Revolution.

Since then the exchange rate became jittery and formed a trend of unstoppable rise by up to several thousand times with concomitant turmoil in investment, import and export and domestic trade but most of all in distribution of Oil Rent within the gangs of the rising oligarchy.

Multiple Exchange Rates as Vehicle for Rent-Distribution.

The revolutionary government adopted a system of multiple exchange rates. The justification was straight forward and “plausible”: to keep import prices low for the consumers. Thus, the “importers” would receive tens of billions of foreign exchange (predominantly US Dollar) every year, at an officially determined and fixed rate while selling the imported goods at market prices which had increased about 7 folds in a decade and there was no effective mechanism of control to assure that some share of the difference passed to the consumer. This, combined with confiscations and expropriations, nurtured the “new class” of Islamist billionaires.

This “multiple rates regime” produced strong beneficiaries within the nomenklatura and their supporting layers so much so that the authorities found it “prudent” not to tamper with it  and thus established  an extra-ordinary channel of distributing the Oil Rent among their loyal adherents:

In 18 years ending 2021, the following volumes of $ US were “injected” into “market” to “manage” the open market Exchange Rate, to no effect:

Table I

During this period the Consumer Price Index (CPI) had increased 23.7 folds and the open market dollar rate had gone up 30 folds, yet the  Central Bank continuously injected Foreign exchange in the “market” at a rate 10-20% of  the free-market rate to “manage the currency market”!

Table II

Exchange Rate $US to Iranian Toman

Consumer Price Index (CPI)  a companion of exchange rate. In tandem with the persistent hike in exchange rate, the Consumer Price Index (CPI) was rising to multiples: Starting with 1979, the general price level increased consistently and outstripped the purchase-power of the populace to whom the revolution had promised prosperity. During the eight-year war period when the left- leaning populist government (of Moussavi- Khamenei) was in place, the general price level increased by 4.4 times, and in the “liberalizing phase” of Rafsanjani, it increased again about six folds on the basis of the previous administration. So much so that after 44 years of revolutionary administrations, the general price level had increased by over 5450 times (Table II), meaning a single Toman of 1979 had the purchase power of 5450 Tomans of 2022.

Table III

Consumer Price Index and the Rise of General Price Level From administration to administration

During this period the earning of the salaried employees increased by about 3500-4000 times in nominal terms which in the face of the price level hike of 5470 times, meant mass impoverishment. Indeed the GDP per capita had diminished by an average of 12-20% when the constant price GDP increased 2.30 times and the population went up 2.60 times from 1979 to 2022!

It is worth noting that the US Consumer Price Index has also changed from 72.6 in 1979 to 294.4 in 2022 to mean that ONE dollar of 1979 had the purchase power of FOUR dollars of 2022. Thus, in comparing the crumbling exchange rate of TOMAN vis-à-vis dollar, it would shine as obvious that the dollar of 1979 had increased 7500 X 4 =30,000 times vis-a-vis Iranian currency.

The Role of the Central Bank in turning the purchase power into smoke!.

The Central Bank despite its rich Poole of knowledge inherited at the time of revolution and  in contradiction to its mission-statement as the guarantor of  Stability of National currency, took over the role of Clearing House for a system of commercial banking and private credit institutions whose number mush-roomed to 19000 at one time, many of which traded in credits and could impact the volume of liquidity. The rise of a “New Class” wielding political influence and judicial immunity backed by brute force, created a “Banking System” whose job was to create liquidity at a pace of “trillions of tomans” per day while the volume of commodities and Services within the national economy was shrinking at a pace of 30% in a decade. Rouhani government produced an average of 970 Billion tomans Per day during his eight years, while his successor Raeissi government added to the spinning of the “printing machine” elevating it to above 5,000 Billion Tomans per day.

Chaos in Asset prices.

Rising liquidity in the face of zero growth inflated the currency. A currency suffering of an “officially acknowledged” inflation of 40-50% , diminished in exchange rate against international currencies which in worst-case scenarios had an inflation of 2 to 10 %. Therefore, the exchange rate plummeted. United States Dollar as a representative of all foreign currencies climbed in value against Toman whose purchase power evaporated and made subsistence difficult for an average house-hold.

Thus dollar as a bench-mark for foreign assets in liaison with other asset-classes like gold, property and “ironically” Cars  gained in price indicating a “melt-down” of national currency.

The chaos and insecurity reigned in the markets of all asset classes because they served as security havens in the face of a melting national currency: the average citizen felt doomed to impoverishment; Property prices and rents were in steady rise; The government budget, with it planned inflation of above 45% and salary-rise of 20%, seemed a planned road-map of immiseration.

Persistent deficit in current account, foreign sanctions and disruption of Trade-venues, blockage of banking routes put severe pressure on imports while eight millions of tons of food stuff stayed onboard the chartered ships, since September 2022 incurring demurrage because of inability of central bank to provide foreign currency.  Shortages appeared in the basic goods markets and prices sky-rocketed. All these were recipes for social upheavals and   threat to national security and would force a responsible nation-state to change course but it is utterly doubtful if the unpopular leopard of Islamic Republic can change its spots!

March 2023