Editorial
Iran’s recurring currency upheavals are often explained away as reactions to political news, temporary shocks or speculative behavior. Such narratives, however, obscure a more fundamental reality: the exchange rate is not an independent market phenomenon but a mirror reflecting the broader health of the macroeconomy. When fiscal imbalances, chronic liquidity growth and external constraints accumulate, currency instability becomes inevitable.
In this context, the rial’s depreciation should be understood less as a cause of economic distress and more as its consequence.
Persistent budget deficits, frequently financed through the banking system or the central bank, steadily erode the value of the national currency. Over time, the economy loses its capacity to absorb new shocks, making each episode of pressure in the foreign exchange market more severe than the last.
Policy responses have often relied on exchange rate suppression and administrative controls. While such measures can temporarily slow price increases or ease social pressure, they come at a high cost.
Multiple exchange rates create distortions, fuel rent-seeking and corruption, and encourage speculative demand. More importantly, they lead to the accumulation of hidden pressures that eventually erupt in sharp and destabilizing currency jumps once intervention capacity weakens.
Real Challenge
Yet the opposite extreme—full and immediate exchange rate liberalization—is neither realistic nor benign under current conditions. Financial sanctions, restricted access to foreign exchange resources, blocked banking channels and the absence of a deep and transparent FX market significantly constrain the applicability of textbook currency regimes. Abrupt liberalization in such an environment risks triggering inflationary shocks and widening social inequalities.
The real challenge, therefore, lies in rejecting the false dichotomy between total control and total liberalization. Exchange rate policy must operate in the middle ground: smart and targeted control, combined with gradual flexibility and credible institutional reform. This approach requires acknowledging Iran’s political economy realities rather than importing simplified policy prescriptions.
Fiscal reform is central to this strategy. As long as chronic budget deficits persist and fiscal dominance shapes monetary policy, any exchange rate arrangement will ultimately fail. Stabilizing the currency without addressing deficit financing and excessive liquidity growth is, at best, a temporary fix.
At the same time, restoring relative balance between foreign exchange supply and demand is essential. This calls for predictable trade policies, fewer obstacles to the repatriation of export revenues, realistic incentives for exporters and disciplined import prioritization focused on essentials and productive inputs. Interest rate policy also matters: when real returns on rial-denominated assets remain deeply negative, capital will continue to flow toward foreign exchange and gold.
Finally, expectations and credibility play a decisive role. In an economy marked by chronic uncertainty, coherent communication by the government and the central bank is as important as technical policy tools. Clear signals, consistent messaging and a transparent reform roadmap can help rebuild trust and dampen speculative behavior.
Without a coordinated package of fiscal, monetary, trade and communication reforms, Iran’s currency market will remain trapped in a familiar cycle of tension, sudden jumps and costly intervention.
