May currency review

When Iran's parliament voted to abolish the fixed official exchange rate of USD 1 / IRR 42,000 back in March 2022, it was supposed to happen immediately. Two years later, the central bank has finally made its move, although strictly speaking it has devalued the rate (by 89%, moving it to USD 1 / IRR 370,000), rather than abolished it. However, given that the official rate has been unusable by anyone except importers of 'essential' goods (and corrupt regime insiders) for many years, the latest change, huge though it is, is unlikely to impact expatriate cost of living very much.

ECA has used the more meaningful 'open-market' exchange rate for its cost of living surveys in the last few years, for the simple reason that the vast majority of prices for goods and services in Iran derive from that rate and not the official one (because most importers can only get dollars on the open market), while bank conversions also use it. Sanctions against Iran mean foreign credit and debit cards are not accepted there, so the exchange rate is irrelevant where they are concerned. (The latest open-market exchange rate is USD 1 / IRR 590,000, meaning little change during May and so Iran doesn't appear on our biggest currency losers table below.)

Iran has likely forced the devaluation to reduce opportunities for corruption, protect its foreign-exchange reserves and boost its budget by realising more rials for the dollars it gets for its exports. Prices for the essential imports covered by the official rate, such as wheat, soya, other foods and medicines, will rise though, but unless buying these products or ones derived from them, such as bread, expatriate staff in Iran are unlikely to notice a great difference.

Bangladesh is another country that has dithered up to now over reforming its exchange-rate regime. It too made a big change in May, devaluing the taka by 8% (see first table below). For a long time, the currency has been essentially pegged to the US dollar, sometimes loosely, sometimes more closely. A multiple-exchange-rate regime was briefly tried last year, but nothing prevented the official rate from heavily overvaluing the taka, making the country less attractive to foreign investors and harming the economy. It was also costly in terms of foreign-exchange reserves, which became dangerously depleted, threatening imports.

In January, in consultation with the International Monetary Fund, Bangladesh's central bank announced it would introduce a 'crawling-peg' system. This doesn't appear to have been implemented, though, and May's devaluation doesn't look like a crawling-peg move - a crawling peg would normally shift the exchange rate in small, incremental steps regularly over time. So this appears to be a simple devaluation aimed at bringing the official rate closer to black-market rates, while helping the bank spend less of its precious dollar reserves trying to protect an overvalued currency level. As most import prices are derived from the official rate, expatriates' spending power is likely to be reduced by any general rise in inflation the devaluation causes. However, their own hard currencies will now convert into more taka, offsetting at least some of the price increases.

Other big fallers in May included the Ghanaian cedi, which is suffering from a slump in earnings from cocoa exports; the Nigerian naira, which lost some of the gains it made in the two months previously, largely as a market correction; and the Zambian kwacha, which despite high prices for the main export, copper, fell heavily as agricultural yields were decimated by the country's worst drought in four decades. 

Only two currencies gained more than 2% against the euro during the month (see next table). The Surinamese dollar was boosted by a good set of economic data.

Finally, here is this month's selected currency movements table: