Iranian lawmaker accuses government of profiting from currency devaluation

A member of the Iranian parliament’s economic committee said on Wednesday that the administration has raised the official exchange rate of foreign currencies to generate revenue at the public's expense,warning of a looming inflationary wave.

"The government's goal in raising the official exchange rate from 550,000 to approximately 640,000 rials per dollar was to sell the $5 billion it had taken from the National Development Fund at the highest price and, which means earning about 1 quadrillion rials from people's pockets," Hossein Samsami was quoted by Tasnim news agency as saying.

However, the Islamic Republic faces real economic pitfalls that have devastated the currency in the past 45 years. From a high of 70 rials for each US dollar in 1978, the currency was trading close to 800,000 per one dollar on Wednesday in Tehran's free market. In addition to its usual weaknesses, the economy has been hit hard with US sanctions since 2018.

In Iran's heavily state-controlled economy, the government has historically dominated foreign currency supply and import controls. Since 2012, when international sanctions triggered a sharp devaluation of the Iranian rial, the government has struggled to keep essential imports affordable.

To manage this, it implemented a multiple exchange rate system, which has become a breeding ground for corruption. Insiders with government-granted privileges, such as import-export licenses, have profited from the difference between the lower official exchange rate and the higher free market rate.

For example, the exchange rate of the dollar in the free market was nearly 800,000 rials per US dollar on Wednesday but the government-sanctioned rate was about 650,000 rials.

A portion of Iran's imports, such as medicine, is currently done using the government-subsidized rate of around 285,000 rials per US dollar, while other imports, like food, are conducted at different rates such as the "NIMA" system, which was about 500,000 rials per dollar until President Masoud Pezeshkian’s government raised it earlier this month. The move was justified as one step towards a unified rate to curb corruption.

Samsami’s accusation suggests the government is prioritizing short-term revenue generation over long-term economic stability and public welfare. He argued that simply unifying the exchange rate—the stated policy goal—will be ineffective without addressing deeper systemic issues.

"The policy of unifying the exchange rate," he emphasized, "will not be successful without implementing its requirements, such as implementing the law on combating smuggling of goods and currency, combating money laundering, and capital flight."

Samsami also challenged the claim that the exchange rates, designed to subsidize essential goods, are not reaching their intended beneficiaries.

However, he acknowledged the complexities of the system, noting that domestically produced goods, such as chicken, are still vulnerable to price increases.

"Domestically produced chicken, one-third of whose costs are covered by the 285,000-rial exchange rate and two-thirds by the NIMA and free market exchange rates, will see its production costs increase if the Nima and free market exchange rates rise,” Samsami explained.

He concluded with a stark warning about the inflationary consequences of the government's currency policy.

"With the government's jump in the official exchange rate, we will witness a wave of inflation in the next two to three months," he predicted. This prediction aligns with economic principles that link currency devaluation to rising import costs and broader price increases.