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Iran unifies its exchange rates

The Central Bank of Iran has long promised to unify the country's official and open-market exchange rates and has steadily been devaluing the former in the last few years to try to catch up with the latter. Unfortunately, the open-market rate, which was the name given to the black-market rate when it was legalised in 2015, has continually outpaced the official rate, leaving it overvalued and lagging far behind.

Now, with enormous downward pressure on the rial coming from the threat of sanctions against Iran being renewed by Donald Trump's regime, possibly in May, Tehran has lost patience and today decided to impose unity on the two exchange rates.

The official rate stood at IRR 38 000 / USD 1 before the move, whereas the open-market rate was IRR 60 000. Both rates have been moved today to IRR 42 000 against the dollar. It is now illegal for any bank or trader to trade at a different rate, although it is unclear whether the new rate will be allowed to move and, if so, what will determine its movements.

The reform means that while the official rate has been devalued by about 10%, the open-market rate has been overvalued by about 30%. Given that the open-market rate has always been considered as the fairer reflection of the rial's actual value, its sudden overvaluation, if prolonged, could cause serious issues for the economy.

As most imports have recently been priced according to the open-market rate, its new valuation should mean that prices of imported goods will go down. However, it is also very possible that shortages of available foreign currency could develop again, as they always do when a domestic currency is significantly overvalued, and shortages could be even more acute if renewed sanctions occur and limit Iranian oil sales. If that happens, a new black market could arise and importers might have to use it to obtain dollars to buy their goods, of course at a devalued rate. If so, prices will soon rise again.

There is more information about today's currency reform in Iran here. If you need advice on how the changes might affect purchasing power for your international assignees, please get in touch.

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