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Home » Economics News, News Map, Southwest Asia and North Africa

Hyperinflation Strikes Iran

Submitted by on October 5, 2012 – 7:10 pm 3 Comments |  
The world’s next hyperinflation episode appears to be underway in Iran, with potentially far-reaching political consequences. Officially, Iran pegs its currency—the rial—at 12,260 to the dollar. In early 2012, black market exchange rates began to diverge sharply from the 12,260 peg, eventually hovering at nearly double the official rate. Over the last month, the value of the rial has plunged further to about 35,500 rials to the dollar. With a monthly inflation rate now estimated at over sixty-nine percent, Iran has crossed into hyperinflation territory, defined as any monthly inflation rate in excess of fifty percent.

The declining value of the rial makes imported goods of all kinds more expensive, since they must be paid for in foreign currency. As international sanctions severely limit the availability of foreign currency, Iranians face skyrocketing prices. The situation is particularly troublesome since Iran needs to import much of the food and many of the manufactured goods consumed by its populace.

Matters came to a head on Wednesday, when Iranian protesters concerned about the currency collapse clashed with police in Tehran’s Grand Bazaar. Police also took time to shut down several merchants engaging in currency exchange. The protests were notable given that the Grand Bazaar has traditionally been a focus of support for the current regime. On Thursday, the Bazaar remained closed, though it seems a few currency exchanges are once more in operation.

Though the crisis only took off in the last several days, it has been in the making for years. Whereas countries like Saudi Arabia have used oil revenues to amass huge reserves of foreign currency, Iran has spent most of its money on subsidies for individual consumption. Much of the currency it has managed to accumulate is now inaccessible due to sanctions relating to its nuclear program. Maintaining a low exchange rate for years has been possible due to high oil revenues, but falling oil exports have made Iran’s fiscal situation increasingly untenable. Oil exports are down fifty-five percent from last year.

So far the government’s response to the escalating crisis has not inspired hope. Some even blame the regime for allowing hyperinflation, as it reduces the budget deficit. Actions intended to forestall the situation, such as the closing of currency exchanges and capping interest rates, appear to have just led to more panic. Two weeks ago, the government attempted to calm currency traders by opening a “foreign exchange center” that would undercut black market rates. The failure of the exchange convinced many that Iran’s central bank is basically out of options.

In a meeting on Wednesday, President Mahmoud Ahmadinejad and members of the Iranian Parliament all seemed rather confused, and wasted no time in pointing fingers at each other. The speaker of the Iranian Parliament, Ali Larijani, blamed Ahmadinejad’s redistribution policies for “eighty percent” of the problem, while acknowledging a role for the sanctions. Ahmadinejad hinted that Parliament should share in the blame, and later ordered the Intelligence Ministry to investigate twenty-two individuals for causing “overwhelming turbulence” in Iran’s foreign currency market.

Outside Iran, and perhaps within, many hope that the current crisis will lead the country to reconsider its nuclear program. The final magnitude and consequences of the crisis have yet to be determined, but it will likely prove the largest challenge the government has faced in years, if not decades. On Wednesday, Supreme Leader Ayatollah Ali Khamenei vowed, in a somewhat ambiguous context, that Iran “will never surrender to pressure.” At the very least, the crisis promises to be a potentially crippling problem for President Ahmadinejad, who implied in his conversation with Larijani that he might resign sooner rather than later, or in his words, “say goodbye.”

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  • Gearalt Ua Fathaigh

    I’ve read elsewhere that the currency’s collapse will actually strengthen the regime’s hold over the country – that the very middle classes who came out to protest in the green revolution in 2009 will be decimated; whereas poorer more conservative classes who form the bedrock of the government’s support won’t feel the pinch as much. The situation will become reminiscent of the pauperisation of the Iraqi middle classes under their sanctions era, when Saddam Hussein’s grip on power became more vice-like. On your other nuclear point; what’s wrong with Iran having nuclear capabilities?; from their viewpoint they are surrounded by nuclear-capable enemies who have a history of meddling and invasion! I think the prospect of any state actor ever using nuclear weapons again is negligible, as they would surely suffer a nasty demise…

    • Nicholas Baldo

      In general, high inflation helps debtors and hurts creditors. This would tend to strengthen the middle class at the expense of the wealthy assuming that the middle class has most of the debt. The poor don’t see many of the benefits of inflation since they tend not to have a ton of debt and they still need to buy food, etc… When inflation gets to really high levels, there are major costs imposed on everyone in addition to the above just because prices are changing all the time. In short, I could see an argument that debtors (mainly in the middle class, I assume) would be less agitated than others, and that this would help the government, but not that this will be especially bad for the middle class. Also, people who get devastated financially tend to be more likely to become agitated, not less.

      On the nuclear point, I wasn’t trying to make an explicit good/bad judgement on the nuclear program in the post, but I do in fact think that proliferation is a horrible idea. This isn’t “fair” to countries like Iran, because as you say Israel and the U.S. have nuclear weapons, but to that I would say that life isn’t always fair, and neither are the most desirable policy outcomes. Anything that increases the chances of a nuclear explosion at the margin (and wastes the Iranian people’s money and brainpower), is a bad idea.

      • gearalt ua fathaigh

        Points taken Nicholas – I’m not a fan of nuclear weaponry (nor the Iranian regime) either; I just have fears the western powers are hell bent on manufacturing the circumstances for conflict with Iran (witness the proxy war with Iran in Syria) as part of an overall geopolitical strategy of securing the biggest hydrocarbon region from potential competitors (not that ludicrous a theory); and re inflation it was my ignorance that thought that aside from food and heat inflation, those who have less possessions and a more subsistence lifestyle (i.e. less monetary goods and services) don’t lose as much porportionately (then again food and heating might hit them harder)….