Why is Iranian Rial So Weak?

A question that is always interesting to find an answer to is, which is the lowest valued currency in the world? While the answer keeps changing depending on various market fluctuations, there are some currencies that are always in contention for this unwanted title. Zimbabwe, not too long ago, went through this crisis. A fiscal crisis so bad that they were printing in denominations of trillions. One Hundred Trillion Zimbabwean dollars would also translate into just 15 USD. The Hyperinflation was crippling the Zimbabwean economy. The only option was to take the currency out of circulation, and adopt to wider used currencies like the US Dollar and the Euro to restart the economy.

Iranian Rial to dollar

Since the Zimbabwean Dollar does not exist anymore, the Iranian Rial has taken this unwanted mantle of being the lowest valued currency in the world. Why is the Iranian Rial the lowest currency in the world then, despite holding 10% of the world’s oil reserves? Iran also has the largest reserves of natural gas in all of the Middle East. These resources are highly prized and continue to be extremely valuable in the modern day and age.

Political Instability

A big reason why the Iranian Rial is valued the lowest in the world is because Iran as a country is in turmoil, and unfortunately it has been this way for a while. Political instability in Iran has creeped into a full blown economic crisis. This political instability has discouraged investors from investing in any infrastructure projects in Iran, or even just investing in the Iranian Rial.

Islamic Revolution

While Iran was struggling economically for many years, Iranian Rial has been in decline since the Islamic revolution. This led to Iran having to deal with a massive capital flight. Iran lost close to 40 Billion USD before and during the Islamic revolution. To combat this, foreign investments were made in the Iranian economy. However, Iran just found itself struggling form the ‘Dutch Disease Phenomenon

The Dutch Disease is not an actual physical ailment, but an economic theory that is built around the apparent causal relationship of demand and supply. The Dutch Disease is established when it’s observed that as a country finds an increase in the economic development in one industry, other industries tend to suffer. As Iran’s oil exports grew with time, Iran lost its competitiveness in other production based economies. And while the exports grew exponentially, as did the imports.

In the recent past, the Iranian Central Bank, the ruling authority on the Iranian Rial, intentionally weakened the currency to gain an advantage with exports and attract more foreign currency into the country. If things were bad in Iran, they took a turn for the worse in 2018, and the country has been in an economic abyss since.

Nuclear Program

To understand what happened in 2018, it is important to understand what happened in the past. The Islamic revolution in Iran, led to the rule of the Shah of Iran being overthrown. The Shah fled to the USA and the USA lost an ally in Iran. In the 90’s, Iran decided to develop its own nuclear program, leading to the United Nations Security Council to ask them to stop. When the warnings fell on deaf ears in Iran, aggressive sanctions were placed against Iran to dissuade them from developing a nuclear program.

Things seemed to get better in 2015 when Iran, the European Union and the 5 permanent members of the United Nations Security Council (USA, Russia, China, United Kingdom and France) seemed to come to an agreement on the Joint Comprehensive Plan of Action or more widely known as the Iran Nuclear Deal. The deal would mean that sanctions would be lifted against Iran, by the USA, EU and the UN if Iran complied with the rules of the agreement.

USA’s Withdrawal

It was all going well for Iran. The economy seemed to be very slowly, but rather steadily making positive strides until May 2018, when the USA announced their termination of the agreement. USA’s withdrawal from the Iran Nuclear Deal, led to Iran losing 59 Billion USD immediately after, and the Iranian Rial lost its valuation by a whopping 60%. Iranian Riyals has been in a freefall since then and things have only gotten worse. The 2019-2020 Gulf Crisis, where Iran and USA were awfully close to a confrontation, and military efforts were intensified by both countries, followed by Iran becoming one of the early epicenters of the novel coronavirus pandemic, have further devalued the Iranian Rial.

Conclusion

The condition of the Iranian Rial is so bad that the Iranian Government finally announced in May 2020, that they had approved a bill to replace the Iranian Rial with the Iranian Toman. Now, one Toman would equal 10,000 Rials. This was supposed to help improve the ease of convenience in conducting trade in Iran. Toman has always been the unofficial unit of counting currency in Iran. But now, with this new bill being passed, it is expected to officially replace the Irani Rial, and phase the Rial out of existence over the next two years. The move to replace the Rial is likely to cost Iran upwards of 160 Million USD. A lot of economists have deemed this change purely cosmetic in nature, with the long term benefits not worth the hassle.

So while the Iranian Rial may be replaced by the Iranian Toman, a lot won’t change in the value of the currency, till Iran works on fixing the economy first. With a lot of setbacks in the last few years, and an impoverishing 2020, the future of the Iranian Rial or the Iranian Toman looks bleak. Hopefully Iran can find its feet soon!

See also: Why is Vietnamese Currency Weak?

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