Iran’s New Three Tiered Exchange Rate and Food Trade

Iran continues to be plagued by financial sanctions that hurt its ability to export oil and import vital goods like food or gasoline, which is scarce due to a lack of refining capacity.

One way to cope with this issue have been oil for food barter arrangements with Pakistan and the acceptance of non-convertible Indian rupees as payment for oil. Now a new coping strategy has been devised with a new currency system.

As the Iranian Rial has lost about half of its value compared to the dollar over the last year, the government has switched from a managed float that kept the official exchange rate in balance with free market rates to a three tiered system that rations foreign exchange.

Such a system was already in place during the Iraq-Iran war in the 1980s and during the subsequent reconstruction in the early 1990s. Food imports had high strategic importance for the Iranian leadership during the war as I outline in chapter four of my Oil for Food book.

The allocation mechanism of the new currency system highlights the crucial importance of food imports for political legitimacy.

The highly subsidized official rate of IR12,260 is less than half the free market rate of IR26,880 rials and applies only to imports of essential commodities like grains, meat, sugar, vegetable oil, and medicine.

For all other items, importers essentially have to pay the double:

The second tier is a “non-reference” rate that only trades about 2 per cent below the free market rate. It currently stands at IR 23,927 and applies to livestock, metals and minerals.

All other imports like appliances, cars or clothes are regarded as less essential and strategic.For them one has to pay the free market rate.

It remains to be seen how this oil for food nexus plays out as the Iranian nuclear stand-off unfolds and whether the US might be tempted to use food trade in an openly political way as it did – unsuccessfully – during the 1970’s.

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