The value of Iranian money has about halved in a year to 110,000 rials per U.S. dollar in informal foreign exchange local markets.
That has led Iran’s central bank to propose a removal of four zeros from their currency, with Abdolnaser Hemmati, Iran’s central bank governor, stating:
“A bill to remove four zeros from the national currency was presented to the government by the central bank yesterday and I hope this matter can be concluded as soon as possible.”
This high level of inflation may have been caused by a fall in the value of Rial against the dollar following the re-instatement of US sanctions.
Traders presumably expected the economy to go down, and thus demand for rial to fall. They weren’t wrong. Nearly 17% growth in 2017 has given way to barely 2% at the end of 2018.
Accounting for inflation, 2018 is a considerable contraction in real terms. The real puzzle here, however, is the considerable level of interest rates.
Firstly, as a theocratic islamic republic, you’d think they wouldn’t have any interest rates at all. Secondly, they have remained incredibly high even while inflation was far lower.
Inflation was at circa 10% in the first half of 2018, for example, while interest rates were 18%. So punishing borrowers, and the economy, very severely for unclear reasons.
Now savers may be punished too with the nocking of those zeros depending on whether inflation will continue to be so high.
In this crisis like environment, cryptos have grown in popularity in Iran. Partly because the government itself has been flirting with creating their own crypto. Partly because they might circumvent sanctions. And partly because it might be an easier way to move funds to a more stable currency.
Late last year, bitcoin, ethereum, and other cryptos, saw a huge premium again the official Iranian exchange rate. While against the informal rate, cryptos appear to be at the same price as globally.
You’d expect a country under sanctions to detach from global prices either up or down due to too much supply or too little. The lack of it in this case may well suggest sanctions are not quite working.
In that case, it would probably be because Europe has not imposed sanctions. Nor has China. The latter is the biggest “manufacturer” of most cryptos, so there wouldn’t be a reason for Iranians to see a shortage in crypto supply.
If cryptos as a barometer suggest sanctions are not working, why would there then be so much inflation? Higher, considerably more, than in 2016 when the country was contracting.
The above may well be one of the most revealing chart in the matter of money. In 2013, inflation had risen above 40% in Iran, to 45% or so. We see there a significant slash of money supply. Inflation accordingly slowly drops and drops to a recent low of 5% in 2016.
Iranian money supply, however, has grown and grown. Now back to 2013 levels. So accordingly, perhaps, they’re back to +40%.
Now they’re going to slash that money supply again, with the cycle presumably continuing as the maestros keep on orchestrating the economy.