Monday, January 23, 2012

How Low Can the Iranian Rial Go?

These are very sad days for my country. Iran's currency is depreciating very fast. How low can it go?

Here is my back-of-envelope calculations based on the following assumptions:

1- Without sanctions 1 dollar=15000 rials. This is what many economists believed was the 'right' exchange rate before the sanctions.
2- No sudden increase in money supply by the Iranian government.
3- Before sanctions oil revenues were 80% of total export.
4- Sanctions will cut X% of Iran's oil revenue.

Here is the model:
E(X)=15000/(1-0.8X)
Here are the results:
If X=30% then 1 dollar = 19740 rials;
If X=50% then 1 dollar= 25000 rials;
If X=80% then 1 dollar = 41670 rials;
If X=100% then 1 dollar=75000 rials.

What can the Iranian government do to control this crisis? The answer cannot be easier: no fancy economic policy is needed, just give the country back to its people!

1 comment:

آنام said...

Mostafa Jan,

There's another problem: government still can export the oil, but this doesn't necessaryly mean that they can bring the money into the country.

Almost all of the oil being sold to Korea is sold in Korean Won, and the the amount remains with two Korean Banks (Woori and IBK), and then this money is used to pay for Iranian import from Korea which is far less than our oil export so the account balance is already a couple of billions positive.

Same is true with the Chinese and Indians.

Now, US (after not being able to pursue Korean and Chinese governments to limit oil import) has targeted such intermediary banks, for example IBK and Woori bank are under extreme pressure to stop or limit deals with Iran and they are already rejecting Iranian LCs related to oil and gas.