Economy, Business And Markets

Rial Wobbles Again

Rial Wobbles AgainRial Wobbles Again

Over the last Iranian year which ended on March 21, the rial weakened by 6% against the dollar to hit 35,000 rials in the ending months, though it settled at about 33,000 rials in the last days of the fiscal year.

The depreciation of the Iranian currency reflects market unease at the combination of falling oil prices in global markets and the continuation of western sanctions, given the lack of a nuclear agreement between Tehran and world powers.  

The rial has previously been affected by prospects over the ongoing nuclear talks, rising from around 39,000 rials per dollar just before the presidential election in June 2013 to 30,000 rials per dollar in January under the new president, Hassan Rowhani, before sliding to 33,000 rials per dollar  in May and then settling at around 31,000-32,000 rials per dollar, although other factors have also influenced the currency market, including a cap on bank interest rates and the bearish performance of the Tehran Stock Exchange.

Alongside, Iran's parliament discussed reducing the oil-price assumption in the budget from $100 per barrel in the last fiscal year to $75 per barrel in the 2015/16 budget. The effect may be mitigated by the government's reduced dependence on oil income, which today accounts for less than half of its revenue compared with around two-thirds before US and EU energy and banking sanctions, introduced in 2012, halved oil exports.

During the past few months, the currency market also reacted to falling oil prices, which necessitates fiscal tightening, resulting in a further fall in the rial's value at around 35,000 against the dollar. However, the recent nuclear framework agreement between Iran and the P5+1, reached on Thursday April 2, caused the rial to depreciate to around 32,500. Linear diagram below represents the rial's fluctuations against the dollar.

There is speculation in the currency market, signaling that the dollar could be traded at 30,000 rials in the coming months as a final agreement by the June 30 deadline is likely.

The Central Bank of Iran has already said it does not let shocks occur in the currency market arguing that they could hurt Iranian exporters.

Central Bank Governor Valiollah Seif signaled this again earlier this week after the nuclear agreement was announced, though it stressed the CBI will not interfere with currency rates. He however said on Saturday he does not expect a dramatic shift in the rial's value.

The fact is that the rial's weak status would stimulate non-oil exports, which including condensates rose by 18 percent year on year to $28.2 billion in the six months to March 2015. Nevertheless, a weaker rial can also lead to spikes in inflation.

The economy therefore benefits from a stable exchange rate market, officials say. The weakness of the rial is not conducive to the government's goal of curbing inflation and reflects the parlous state of the economy under sanctions.  As nuclear talks reach the key framework agreement, the market rate of the rial will be subject to further volatility, but if Iran manages to get rid of sanctions, the gap between the two rates of the rial (official and market rates) could be narrowed, a target that Seif's team in the central bank strives to hit.