Iran’s currency, the rial, has dropped sharply since last week. The central government is intervening to stabilize the currency. In Tehran, that means trouble in the streets and tear gas to try to disperse the crowds.
I have a hard time getting any reliable information on the currency dynamics involved. It is easy to find theories, including the president’s talk of the “psychological pressures” of an “economic war,” but among all the theories I have seen in the press, none ring true.
If the cause of the currency decline is not obvious, the solution is less so. The government is looking for answers out on the street. Police today stepped up pressure on shopkeepers to reopen shops closed because of fear of protests against rapidly rising prices, combined with the currency uncertainty itself. Some shops have reopened, but with thinner inventories than usual. Meanwhile, the government is trying to gain a greater degree of control over the currency-exchange process at the street level, where exchange rates have not always maintained any connection to the international markets in recent days.
My best guess is that the real problem in Iran is the growing gap between production and standard of living. Iran for decades has promoted population growth while harassing its economic base. Productivity has suffered, and production of food and consumer goods especially have not been keeping up with the growth in population. Even without knowing the specific mechanisms at work in the currency markets this week, they ultimately cannot be too far removed from the fundamental diverging trends in Iran’s economy.