* Central bank says to change official "reference rate"
* Media speculate it may drop to 15,000-16,000/dollar
* May indicate authorities want to protect foreign reserves
* But move could add to high inflation
* Change could prompt further rial slide in free market
By Yeganeh Torbati
DUBAI, Aug 6 Iran's rial sank about 5 percent in
trading against the U.S. dollar on Monday after the central bank
said it would change the currency's official exchange rate,
prompting fears of another devaluation as the economy suffers
from international sanctions.
The rial was trading in the free market at around 21,510 per
dollar, according to Persian-language currency tracking website
Mazanex, down from about 20,440 on Sunday.
Most dealers in Tehran's major currency trading district
stopped selling dollars on Monday and removed signs from windows
advertising their rates, Mehr News Agency reported. It said the
rial fell as low as 22,000 before partly recovering to 21,400.
Central bank governor Mahmoud Bahmani said on Sunday he
would announce a change to the government's "reference rate" of
12,260 rials to the dollar "within the next 10 days", Iranian
He did not elaborate, but Iranian media speculated the new
reference rate might be between 15,000 and 16,000 rials. Most
Iranians are unable to obtain dollars at the official rate and
must instead use the free market, which is far more expensive.
Iran's economy has been hit hard in the past year by
sanctions imposed over its disputed nuclear programme. The
country has largely been cut off from the international banking
system and the rial has lost about half its value against the
dollar in the free market.
The sanctions have slashed Iran's oil exports, which in
normal times accounted for nearly four-fifths of its total
exports and two-thirds of government revenues. In June, Tehran
admitted its oil exports had shrunk between 20 and 30 percent.
In January this year, Iran announced an 8 percent
devaluation of the rial to 12,260 against the dollar and said it
would enforce a single exchange rate, aiming to stamp out black
market traders. But that proved impossible with the sanctions
cutting inflows of hard currency into the country.
In March, authorities said they would allow free market
trading to coexist with the official rate, and last month they
introduced a three-tiered system; the official rate would be
used to import basic goods such as meat and medicine, a rate of
15,000 to buy factory machinery and intermediate goods, and the
free market rate to import luxuries and other goods.
Mehr quoted Hamid Safdel, deputy minister in the Ministry of
Industry, Mining and Trade, as saying the new official rate
would be somewhere between 12,260 and the free market rate.
Iran's decision to depreciate the exchange rate may indicate
its foreign exchange reserves are being drained by the sanctions
and that in order to conserve them, it realises it must make
hard currency more expensive.
Bahmani was quoted by Mehr as saying on Sunday that the
government had no problem securing foreign currencies.
At the end of last year Iran had $106 billion of official
foreign reserves, enough to cover an ample 13 months of imports
of goods and services in normal times, according to the
International Monetary Fund.
That suggests Tehran probably faces no balance of payments
crisis in the near term. But with oil exports shrinking, a
global economic slowdown threatening to push oil prices down
further, and banking sanctions making it more expensive for Iran
to import many goods, Tehran may feel a growing need to protect
In April the IMF predicted Iran's crude oil exports would
shrink to 2.0 million barrels per day this year from 2.5 million
last year, causing its current account surplus to drop from 10.7
percent of gross domestic product to 6.6 percent. A deeper cut
in oil exports, combined with lower oil prices, could
conceivably push Iran into running an external deficit.
Currency depreciation is a risky strategy to deal with this
threat, however, because it could fuel inflation. Consumer
prices have been rising at annual rates above 20 percent,
becoming a political liability for the government.
Ayhan, a university professor in Tehran who declined to give
his full name because of the sensitivity of the issue, said any
depreciation of the official exchange rate might fuel Iranians'
expectations for even more rial weakness.
"If the government rate becomes 17,000 rials to the dollar,
the free exchange rate will become 26,000," he said.