Strained by Sanctions, Iran Eases Money Policy

NYTimes.com -- Pressured by tightened Western economic sanctions and a burgeoning black market for dollars, with Iranian citizens desperate to buy them, Iran’s central bank has loosened its strict foreign exchange policy, allowing money traders there to sell dollars for rials at the unofficial market rate, rather than the artificially fixed official rate.

Few Iranian money changers had been willing to sell dollars at the official rate, 12,260 rials to the dollar, because it was unprofitable for them.

The glaring absence had caused a surge in illicit money changing in Iran, in which buyers who needed dollars were willing to pay ever-increasing numbers of rials for them, pushing the unofficial market rate to about 19,000 rials to the dollar.

Economists said the eased exchange rate restriction, which was announced on Sunday, appeared to be a bow to reality.

“It was extremely difficult to outlaw a market that the people desperately need,” said Djavad Salehi-Isfahani, an Iranian economics professor who teaches at Virginia Tech and has followed the foreign exchange problems confronting Iran. “Iranians were doing this outside the formal market, so letting it become formal was logical.”

Dollars and precious metals like gold are coveted in Iran because they have proved to be an effective hedge against the rial’s weakness from worsening inflation, estimated to be more than 20 percent a year.

Dollars are also in high demand in Iran because they are needed for travel abroad and for other foreign expenses like overseas college tuition. The appetite for dollars in Iran has put even more pressure on the rial, which has lost about half of its value in the past year.

Economists said the eased exchange rate restriction, which now simply requires money changers to report the rate at which they sell dollars for rials, would provide the central bank with more precise information about the domestic demand for dollars and enable it to track the disparity between the official rate and the market rate more accurately.

The official rate was designed in part to prevent a flight of capital from the country.

But the eased policy creates new risks for Iran’s government by raising the likelihood of such a capital flight, as Iran’s economic isolation increases because of the sanctions imposed by Western powers in response to its disputed nuclear energy program.

The sanctions have targeted the banking and oil sectors of Iran’s economy and have made it increasingly difficult for Iranian companies to import needed goods and conduct business abroad.

The sanctions are expected to intensify further in coming months, as the European Union imposes a boycott of Iranian oil starting on July 1 and the United States enforces a new law that can penalize any foreign company that does business with Iran’s central bank by denying that company access to the American market.

The eased policy on currency trading also appeared to be one of the central bank’s first public responses to its expulsion from a global telecommunications network of banks that took effect on Saturday, part of the tightening vise of sanctions.

The expulsion from the network, the Society for Worldwide Interbank Financial Telecommunication, or Swift, severed an important link between international financial markets and up to 30 Iranian financial institutions, including the central bank.

Iranian leaders have denounced the sanctions and vowed to find ways to bypass their effects. The Iranians have negotiated barter deals with Russia and India to avoid spending dollars and other foreign currencies, for example.

Reuters reported Monday that Pakistan had decided to export one million tons of wheat to Iran in a barter arrangement, possibly in exchange for Iranian iron ore.