Bloomberg News

Iran Central Bank Plans to Devalue Rial 8.5% Against Dollar

January 26, 2012

(Updates with comment from economist in fifth paragraph.)

Jan. 26 (Bloomberg) -- Iran plans to devalue the rial by about 8.5 percent against the U.S. dollar, setting a new exchange rate and vowing to reduce the black market’s influence as international sanctions undermine confidence in the currency.

Iran will fix the rial rate at 12,260 to the dollar as of Jan. 28 and seek to meet all demand for foreign currencies through banks, state-run Mehr news agency reported, citing central bank Governor Mahmoud Bahmani. The reference exchange rate on the central bank’s website today was 11,296 per dollar.

With the modified policy, “people will no longer need to use free markets to access dollars,” Bahmani said today, according to Mehr.

The decision follows an announcement yesterday that the interest rate paid on rial savings will be raised. Iranian authorities are fighting to stabilize the currency amid domestic concern that the government may be unable to maintain economic stability as international pressure on the country over its nuclear program grows.

“Iranian consumers have been losing confidence in the rial very rapidly and this is aimed at restoring some stability,” Meir Javedanfar, a lecturer on Iranian politics at the Herzliya Interdisciplinary Center in Israel, said by telephone. “Whether it works is another matter. Experience shows the economic plans of the Ahmadinejad government don’t always work the way they want.”

Currency Reserves

President Mahmoud Ahmadinejad said today that the country has $90 billion in foreign-currency reserves earned from the sale of oil.

Iranians had already been paying far more than the central bank’s reference rate for dollars. The currency strengthened on local markets to about 19,000 from a record 23,000 per dollar after the announcement of higher interest rates, Donya-e-Eqtesed newspaper reported today.

The announcement about changes in currency management comes three days after European Union foreign ministers announced more sanctions to ratchet up the pressure on Iran’s nuclear program. The EU will ban Iranian oil imports from July and freeze assets of the central bank and eight other entities. The U.S. has also curbed financial transactions with Iran and its officials are touring the world to boost support for the measures.

Iran yesterday raised interest rates on savings accounts to as much as 21 percent from between 12.5 percent and 15 percent. The new rate is set to be higher than inflation of 20.6 percent, said Kazem Delkosh, a central bank official.

--With assistance from Steve Bryant in Ankara. Editors: Jennifer M. Freedman, Karl Maier

To contact the reporter on this story: Ladane Nasseri in Dubai at lnasseri@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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