As Iran’s economy grapples with sanctions, chronic inflation and persistent exchange-rate volatility, some policymakers continue to defend a system of multiple exchange rates combined with tighter oversight of import and export chains.
Proponents argue that if subsidized foreign exchange is strictly limited to essential goods and production inputs—and if the state can monitor the entire allocation chain through digital platforms—the impact of currency swings on household welfare can be contained. In this view, the core problem is not the multi-tier exchange rate itself, but weak governance and imperfect implementation.
Economic theory and cross-country experience, however, point in a different direction. Multiple exchange rates are structurally prone to inefficiency, higher transaction costs and distorted resource allocation—even under the optimistic assumption of effective oversight. Rather than insulating domestic prices, such systems tend to push them higher over time.
The first transmission channel is transaction costs. In a multi-rate regime, firms devote significant time and resources to navigating administrative procedures, securing approvals and managing uncertainty over access to subsidized currency. These hidden costs rarely appear in official statistics but are embedded in final prices. Regulatory uncertainty—delays, rule changes or interruptions in allocation—raises risk, prompting importers to add risk premiums. As a result, the subsidy embedded in cheaper foreign exchange is only partially passed on to consumers.
Systemic Inefficiency
The second channel is systemic inefficiency. Multiple exchange rates function as implicit subsidies and taxes that skew incentives. Profitability becomes linked not to productivity or competitiveness, but to access to preferential currency. Less efficient firms with better connections survive and expand, while more productive firms without access are weakened or crowded out. Over time, this reduces effective supply, erodes quality and adds upward pressure on prices.
The third and most consequential channel is resource misallocation. Scarce foreign exchange is distributed administratively rather than through price signals, encouraging arbitrage, hoarding, misclassification of imports and diversion to non-productive uses. The wider the gap between official and market rates, the stronger these incentives become. Eventually, domestic prices gravitate toward higher market-clearing levels, neutralizing the initial intent of price control.
Empirical research on bureaucratic complexity reinforces this conclusion. Studies on developing economies show that excessive administrative layers, especially in countries with weak institutions, tend to worsen corruption and degrade performance rather than improve oversight. More procedures often create new rent-seeking opportunities instead of closing existing ones.
Iran’s own experience aligns with these findings. Each additional monitoring layer—new permits, platforms or inspections—has tended to relocate corruption rather than eliminate it, while imposing high fiscal and administrative costs on a state already constrained by budget deficits and institutional fatigue. Economic actors, in turn, divert resources away from productivity and innovation toward managing regulatory risk and informal networks.
Against this backdrop, many economists argue that simpler and more transparent policies are more effective. Moving toward a unified and transparent exchange rate, combined with direct and targeted support to households—such as cash transfers or well-designed commodity subsidies—can reduce distortions, lower corruption risks and ensure that support reaches consumers directly. For an economy with limited administrative capacity, simplicity is not a weakness but a prerequisite for policy effectiveness.
