With just a week to go until the first phase of heavy US sanctions snap back on Iran, the Iranian rial (IRR) plunged to a new low on July 29, hitting 112,000 to the dollar on the black market compared to the 98,000 seen the day before. That represented a 12.5% d/d decline and many observers could only conclude the currency is in free fall.

The official exchange rate—which is fixed by the state and is only available to hard currency buyers approved by the government—remained at 44,070, as against the 35,186 seen at the start of the year and prior to Donald Trump in early May imperilling Iran’s economy by withdrawing the US from the nuclear deal and announcing a strategy of forcing Tehran to renegotiate its role in the Middle East by crippling Iran’s economy.

The US sanctions due to take effect on August 6 will target Iran’s acquisition of dollars, trade in gold and precious metals, sale and transfer of various metals and materials, sovereign debt and the automotive sector. The second wave, to be reimposed on November 4, will, among other sectors, hit Iran’s exports of crude oil and petrochemicals, shipping business and energy industry. Secondary sanctions that will be aimed at foreign financial institutions that choose to continue doing business with Iran will also come into play.

Ample hard currency reserves?
Iran was reckoned to hold more than $132bn in hard currency reserves and $600mn in gold, local media reported in January. If there are ample reserves of hard currency in the Central Bank of Iran’s (CBI’s) vault, the implication might be that people should have nothing to worry about in terms of the rial’s stability. Indeed, data in the Central Intelligence Agency’s (CIA) December 2017 factbook edition can be said to back up that point. Iran has higher currency reserves than more than 156 other countries around the world including Norway, Australia and Turkey.

However, the speed of the devaluation of the spiralling IRR has taken Iranians by surprise and recriminations have flown over officials’ handling of the foreign currency exchange market since Trump turned up the heat on Iran. Angry traders have even taken to the streets and on July 25 central bank governor of five years Valiollah Seif was replaced by Abdolnasser Hemmati.

Over the weekend there was speculation in Iran that Seif has flown to Australia, where his children have residency. Seif is said to be the target of lawsuits that cite his allegedly inept handling of the rial’s precipitous fall. There has been much anger over how officials have gone about selecting those lucky enough to be given access to the official rial-to-the-dollar rate.

Iranians of all walks of life and political stripes are being urged to patriotically rally around the flag in preparation for the fight against sanctions, a battle which the EU has pledged to assist although it has to date only announced a few small initiatives, such as some trade financing. But the US is gearing up for an aggressive economic attack, which includes an attempt to stop almost all Iranian oil exports by the end of this year and even targets the Islamic Republic’s exports of Persian rugs and pistachios.

Bread riots
One reform-minded economist, Hossein Raghfar, has warned that the continued slide of the IRR “could lead to bread riots”. He noted, however, that they may be orchestrated by hostile groups outside the country. Raghfar also reportedly said that several decision makers in the ruling establishment, who have been at the helm of the country’s bureaucracy since the Islamic Revolution in 1979, should over the years have been held accountable for Iran’s lack of economic progress, Etemad newspaper reported.

Another economist, Professor Steve Hanke of Johns Hopkins University in the US, has, meanwhile, suggested that inflation in Iran stood at 203% on July 29 when the black market rate for the IRR is used as the basis for the calculation. His analyses of Iranian inflation have lately come under fire online from Iranians, leading him to tweet on July 29. “The regime in Iran is lying about their inflation rate. I measure inflation in Iran by using the implied black-market IRR/USD exchange rate and Purchasing Power Parity (PPP) values, which is the most accurate method.”

Hanke also tweeted that he believed the rial had "entered a classic death spiral".

The Statistical Centre of Iran (SCI) stated that the inflation rate for the 12 months to July 21 stood at 8.7%, rather lower than Hank’s rate.

“Hanke states the facts much better, but it must be noted that the economic performance of a country cannot be assessed and cited based on the inflation index; because the inflation rate is an average of hundreds of heterogeneous goods. Averages never indicate the facts. And what year is the base year is also an important criterion,” Mohammad Gholi Yousefi, a professor of economics at Iran's Allameh Tabataba'i University, told local media.

Albert Beghzian, an Iranian economist at the University of Tehran, said people should assess Hanke’s figures at the end of the current year to assess whether his statistics are more accurate than the official Iranian statistics. “Hanke's approach to calculating the inflation rate in Iran is based on the regression model. That means that, with the statistical model, the relation between the inflation rate and exchange rate changes has been calculated. In fact, [the approach] uses prediction models based on historical data. But the method of the Central Bank and the Statistical Centre of Iran for calculating the inflation rate is based on a basket of goods, which is not reasonable, considering the increase in the price of goods such as vehicles in the market. Therefore, it seems that even if the calculation of the inflation rate by the Iranian authorities is not wrong, it is very optimistic,” he added.

Iranian financial news agency IBENA provided another example of the severe stress besetting the Iranian economy, reporting that the Imami gold sovereign coin was selling at an all-time high of IRR43mn on the free market, while shares in companies viewed as having secure prospects, including engineering group MAPNA, rose to record levels.