1. The Iranian rial hit a historic low against the dollar this week. But the price of 201,500/1 doesn't give the full picture of what is happening in Iran's foreign exchange market. That's the price for a physical "greenback" in Tehran, a fraction of the whole FX market... 
2. The FX rate that matters most for Iran's economy is the rate available on NIMA, a centralized exchange where importers/exporters must buy/sell foreign currency. This was set up in 2018. The NIMA rate, managed by the central bank, is shown by the red line in the chart above.
3. If you look at the "free market" rate and the NIMA rate together and index them, you'll see that the rial lost value in NIMA about one month *before* the devaluation we saw this past week in the free market.
4. The two episodes were of similar scale, with the rial losing around 15% of its value in a couple of days. The reason for the devaluation in NIMA was because of COVID-19 impacts on the availability of FX for Iran's importers.
financialtribune.com/articles/busin…
financialtribune.com/articles/busin…
5. The NIMA and subsidized trade rates accounts for around 80% of the FX market, while the rate for "eskenas," or hard currency is just 20%. Yet, whenever we get reporting on what's happening with Iran's currency, it's the free-market rate that dominates the analysis.
6. This is an ok way to get a picture of what's happening to Iranian purchasing power, but it doesn't account for the fact that, as a general rule, what happens to the NIMA rate is a driver of inflation, whereas what happens in the free market rate is a hedge against inflation.
7. In short, when FX gets more expensive in NIMA, it means that imported goods are going to be more expensive. These costs are passed onto the consumer. Iranian consumers go to the shop and see something basic durables get more expensive (because a lot of parts are imported).
8. Iranians have a sixth sense for inflation. They see these prices increases and they react. It's possible that between May and June, the hit to NIMA caused some consumer goods to get more expensive, and added to general economic uncertainty, Iranians bought dollars as a hedge.
9. Inflation was also impacted by the government pumping liquidity into the market as part of the COVID-19 response, including by increasing direct cash transfers. Taken together, these factors saw CPI rise 2% between mid-May and mid-June (durables 11%).
amar.org.ir/Portals/1/Cons…
amar.org.ir/Portals/1/Cons…
10. In this way, a supply-side disruption (lack of FX in NIMA) can translate into a demand-side driver (people lining up to buy dollars in Tehran). The Central Bank of Iran then needs to calm both sides of the market. It's a tough task.
11. CBI has been trying to close the gap between the NIMA rate and the free market rate over the last year and in the summer of 2019 they basically had achieved it. Doing so sustainably would reduce volatility in both sides of the market. But COVID-19 threw a wrench in the gears.
