27/03/2018 07:34 AST
The Iranian rial fell to a record low yesterday, breaking through the 50,000-to-the-dollar mark for the first time as analysts blamed uncertainty from Washington.
The rial has lost around a quarter of its value in the past six months, hitting 50,860 against the US dollar, according to Financial Informing Network, a trusted Iranian website for open market currency rates.
The gap between that and the official rate, which stood at 37,686 yesterday, has continued to widen.
Iran's government took drastic measures last month to stem the decline in the free market rate, arresting foreign exchange dealers, freezing speculators' accounts and raising interest rates.
But on the streets of Tehran, long queues continued to gather outside foreign exchanges in the run-up to this month's Nowruz New Year holiday.
"The issue is psychological rather than economic. There's no reason to buy dollars except in the hope that you can sell them later at a higher rate," said Esfandyar Batmanghelidj, founder of the Europe-Iran Forum, a business network.
He said Iranians were reacting to worrying news from the US, where President Donald Trump this month appointed hardline anti-Iran figures Mike Pompeo and John Bolton to senior posts in his administration.
Many analysts believe Trump will pull out of the 2015 nuclear deal with Iran when it next comes up for renewal in May, bringing back crippling sanctions.
"I see many people looking to invest in neighbouring countries because this fear is spreading about the future of the JCPOA (nuclear deal)," said Navid Kalhor, a Tehran-based financial analyst.
Local officials have complained that Iranians are hoarding billions of dollars as local banks run short of cash.
"I have friends who go to banks and ask for 15mn or 20mn rials ($300 or $400) and they're told to come back in a week because they're out of cash," said Kalhor.
The devaluation poses a major problem for President Hassan Rouhani's government, which had hoped to attract massive foreign investment in the wake of the nuclear deal.
Already facing huge obstacles from remaining, non-nuclear US sanctions, the collapsing currency will serve as another deterrent to potential investors, Batmanghelidj said.
"Even in an instance where an investor is willing to operate in Iran, the devaluation is very concerning. If you invest now and the currency falls even 15%, you have to discount that from your returns, and that's very difficult to hedge against," he said.
"This will be difficult for the government. There is very little they can do about the mentality of individuals."
The government has resisted unifying the official and free-market rates of the rial because it would mean more expensive imports and therefore higher inflation.
But analysts say the gap has distorted trade and fuelled corruption.
Perhaps the biggest challenge is that hoarding dollars has become a preferred way to store money amid economic uncertainty, especially after a housing boom stagnated after years of over-construction.
Iranian banks have tried to counter this by offering interest rates as high as 20%.
But this has only fuelled wider problems in the economy by discouraging investors from putting their money into businesses.
"The situation in the economy right now is far from beautiful," said Kalhor.
Gulf Times
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