An economic expert analyzes the reasons for the fall of the Iranian riyal

Isaac Saedian: The continuous decline in the riyal has caused many damages to the social and economic body in Iran (Al Jazeera)

Tehran -

Dr. of economics and professor at the University of Tehran, Isaac Saeedian, believes that regional tensions are not the main factor in the collapse of the price of the Iranian national currency, but rather describes it as a catalyst to accelerate the process of the fall of the Iranian rial.

In an exclusive interview with Al Jazeera Net, Saeedian provided an analysis and explanation of what the Iranian economy is witnessing today, specifically the collapse that the Iranian national currency is witnessing with the increasing war rhetoric towards Iran and its allies in the region.

Below is the full text of the dialogue:

• Why has the value of Iran's national currency continuously declined over the past forty years?

The Iranian economy has witnessed many failures in the past half century, and in the meantime, the decline in the intrinsic value of the rial is something that many economic activists are discussing.

In recent weeks, the value of the Iranian riyal against the dollar reached 60,000 tomans.

But what causes the continuous devaluation of the Iranian national currency during the mentioned period?

From an economics point of view, the intrinsic value of each country's national currency depends on several main determinants, namely:

 gross domestic product.

Inflation rate.

Bank interest rate.

Economic growth rate.

Balance of exports and imports.

The amount of liquidity in the whole country.

Systematic risks.

Since 1960, the Iranian government has tried to make a fundamental change in the country's economic affairs, and as a result, Iran's GDP and economic growth rate has recorded impressive growth in 10 years.

At that time, the government announced that the bank interest rate was proportional to the country's single-digit inflation rate.

But gradually, since 1970, Iran decided to increase the country's budget, and for this purpose, it tried to bring petrodollar income into the country's economy at the same time that oil prices in the world rose.

Since the beginning of 1968, Iran's oil income has increased significantly, as Iran was selling 638 thousand barrels of oil per day before the above-mentioned date, and sales reached 6 million barrels per day after 1968. In other words, Iran's income from selling oil increased 20 times. , lump sum.

• What happened with the entry of oil money into the Iranian economy?

With the entry of oil money into the Iranian economy, we saw that the amount of liquidity in Iran increased.

As liquidity increased, inflation was increasing, and at the aforementioned time, and in accordance with the economic growth and appropriate GDP of the past decade, the Iranian economy was able to avoid the risks of inflation and devaluation of the national currency.

But after the Iranian Revolution and the start of the Iran-Iraq War, as well as the flight of large capital from the country and the withdrawal of many factories from the private sector, Iran's GDP was exposed to a crisis.

Since then, one government after another has tried to base their budgets on abundant revenues in the absence of sufficient GDP.

This led to an increase in the volume of liquidity and the monetary base, and on the other hand, it caused an increase in the inflation rate.

This procedure continued during various governments until the era of former President Mahmoud Ahmadinejad.

At that time, Iran had a large volume of liquidity, and its GDP was not in a favorable position. At the same time, the Ahmadinejad government decided to implement the targeted support law, which caused the volume of liquidity and the monetary base to double.

At that time, the selling price of Iranian oil rose to an unprecedented level.

Therefore, at the aforementioned time, the amount of liquidity in Iran increased several times, and this amount was not supported by GDP.

At the same time, systemic risks were severely strangling the Iranian economy due to Iran's involvement in the nuclear file with the P5+1 countries.

During the aforementioned period, Iranian liquidity increased to such an extent that systemic risks served as a spark to ignite the fire in Iran's cash powder store, and caused the value of the rial to decline from 2006 until now.

The price of the dollar at the time was about a thousand tomans, and currently it ranges between 55 and 60 thousand tomans.

• How did American, international and UN sanctions affect the Iranian economy?

During Ahmadinejad's government, Western governments, led by the United States, imposed a variety of harsh economic sanctions against Iran. These sanctions targeted the core of the Iranian economy. The sanctions became one of the most important systemic risks for Iran, and caused the Iranian national currency to fall as much as possible.

Of course, it should be noted that after the Ahmadinejad administration, the administration of former President Hassan Rouhani was able, during a period of 4 years, to remove some systemic risks and sanctions from the Iranian economy, by reaching the nuclear agreement with the P5+1 countries.

During the aforementioned period, Hassan Rouhani's government tried to reassure foreign investors within the Joint Comprehensive Plan of Action (JCPOA) agreement so that they could invest in Iran's primary industries, especially oil, gas and petrochemicals, and modernize the fleet of the above-mentioned industries with modern equipment.

But luck was not on the side of the Rouhani government, and with former US President Trump withdrawing from the JCPOA, other European governments showed no interest in investing in Iran.

However, during Hassan Rouhani's first government, appropriate social and political optimism prevailed in the context of the Iranian economy, and caused the Iranian rial to stabilize at that time, but mere optimism was not enough to bear the burden of Iran's economic illness.

Because during the mentioned period, the volume of liquidity without supporting Iran's GDP increased significantly, and again with the US withdrawal from the JCPOA, the value of the rial decreased again.

• How do you see the level of economics and policies regarding economic affairs in the current Iranian government?

In the government of current President Ebrahim Raisi, many efforts were made to keep the value of the rial in a stable range, which was done regardless of economic indicators, and with the start of some protests in Iran, which were considered a systemic risk, the value of the Iranian rial decreased again.

Of course, it should be noted that the systemic risks to which the Iranian economy was exposed reached their peak during the era of the government of Ebrahim Raisi, which we will talk about briefly:

– Internal protests in Iran known as the Mahsa Amini protests.

- The war in Ukraine, which prompted the government to lift subsidies on some important items of basic commodities, and as a result, families’ tables became smaller and inflation increased.

– The beginning of the Gaza war.

- The conflict between the forces of the axis of resistance in the Middle East with America and Israel.

Of course, in the meantime, the Iranian government has tried to ease the burden of international sanctions by joining the BRICS and Shanghai agreements.

• But by signing the above-mentioned agreements, i.e. BRICS and Shanghai, was Iran able to get a good opportunity to improve its economy?

In the Iranian media space, membership in these agreements has appeared, in a way that suggests that Iran is practically able to bypass sanctions and has appropriate trade relations with the member states of the above-mentioned agreements.

While most of the member states in these agreements have extensive trade relations with the United States of America, these countries are unlikely to expose their commercial and economic interests to risk in exchange for trade with Iran as long as the sanctions cast a shadow on the Iranian economy.

• In short, how do you classify the determinants of the collapse of the Iranian national currency?

In short, the factors for the fall of the riyal are classified into two parts:

1- Decisions

of the country’s economic management.

- Setting a negative interest rate relative to inflation in the country's banking network, forcing people to try to move their money to different markets as quickly as possible to be safe from inflation and the decline in the value of their assets.

Purchasing gold, foreign currency, real estate, and cars are among the most important and basic parallel markets in Iran.

In other words, the bank interest rate in Iran has been lower than the inflation rate in the country's economy in some periods, and this has led many people to decide not to invest their capital in the country's banking network with the aim of obtaining monthly interest, due to the negative interest rate.

– Lack of economic growth and GDP, making liquidity worthless.

-The huge increase in unsubsidized liquidity in the country.

– Inflation in the rate of production and inflation in goods and services.

- The government budget deficit, as one of the most important economic factors is the budget deficit of various governments in the past forty years, which, according to the above-mentioned explanations, wrong economic decisions caused a large budget deficit in the Iranian economy.

In order for governments to be able to achieve a balance between their income and expenditures, they began printing money directly and indirectly.

In other words, they created money without real support. As a result, every year that this cycle repeats, the value of Iran's national currency also declines.

2- Systematic risks.

The most important systemic risk to the Iranian economy in the past forty years has been the targeted economic sanctions regime, because Iran's trade doors with other countries have been gradually closing due to the sanctions.

– Regional systemic risks, and since Iran did not participate in a direct military war after the Iran-Iraq war, the systemic risks of the Middle East region only contribute as a motivating factor for the rapid decline of the riyal in this cycle, but contrary to what some see, regional events are not the primary factor in itself in the decline in the value of the riyal.

• What are the consequences of the depreciation of the rial on people in Iran?

There is no doubt that the continuous decline for several years in the value of the Iranian national currency has caused many damages to the social and economic body in Iran.

There has been a smaller family table, a lack of adequate funding for the working and middle class, difficulty in securing a living wage, and an increase in social and other crimes.

In any case, the Iranian people have seen over 50% inflation in their economic lives over the past 15 months, and they are still trying to keep their money safe from inflation by converting it into currency, gold, and cars.

• What are your expectations for the next Iranian year, which begins around mid-March?

It is expected that in the Iranian year 1403, due to deep economic recession, inflation of commodity production and heavy taxes on companies and producers, we will witness the departure of large capitals from Iran to other countries.

It is worth noting that the Central Bank of Iran has announced in recent weeks that it has decided to stabilize the price of the riyal against other currencies within a specific range, but as long as investment security is not guaranteed and with the continued numerous risks and decline in investment in Iran, it is unlikely that the riyal will remain relatively stable in the long term. the long.

Source: Al Jazeera