Iran Moves to End Preferential Exchange Rates Amid Inflation, Protests, and Competing Economic Assessments

Iran’s government has begun implementing one of the most far-reaching economic policy shifts of recent years, moving to dismantle the country’s long-standing multi-exchange-rate system.

Iran’s government has begun implementing one of the most far-reaching economic policy shifts of recent years, moving to dismantle the country’s long-standing multi-exchange-rate system and replace subsidized import dollars with direct payments to households. Officials say the reform is intended to eliminate rent-seeking, reduce price distortions, and ensure subsidies reach ordinary citizens, rather than intermediaries. The shift, however, is unfolding amid high inflation, currency volatility, and significant protests, and has sparked a growing debate among economists over whether the policy sufficiently protects domestic production.

For years, Iran operated under a fragmented foreign exchange regime that included a preferential dollar rate of 28,500 tomans for select imports, alongside semi-official and open-market rates. The system was originally designed to keep essential goods affordable, but over time it became widely associated with corruption, arbitrage opportunities, and weak transmission of subsidies to consumers. President Masoud Pezeshkian has argued that recipients of both the preferential and semi-official rates were effectively benefiting from state-created rent, stressing that his government does not intend to remove subsidies but rather transfer them from the beginning of the supply chain to the end consumer.

Under the new framework, the government plans to remove preferential exchange rates for most imports and compensate households directly. The core of the policy is a monthly commodity credit equivalent to 1 million tomans per person, delivered through an electronic voucher system usable at more than 268,000 retail outlets nationwide. Authorities say an initial lump-sum payment of 4 million tomans per person will be deposited to household heads’ cards, with unused credit rolling over to subsequent months. Existing cash subsidies, the Yasna program, and malnutrition assistance schemes are to remain in place, while around 20 million additional people are being added to subsidy coverage. Prices under the voucher system are to be regulated by the state, though officials acknowledge that price increases are unavoidable.

Government spokesperson Fatemeh Mohajerani said on state television that following the liberalization of exchange rates, cooking oil, chicken, and eggs are expected to experience sharper price increases than other goods, while most remaining items could rise by 20 to 30 percent. These increases come on top of an already severe inflationary environment. According to the Central Bank, point-to-point inflation reached 49.9 percent, while annual inflation stood at 42.4 percent. Price pressures have been especially acute in goods, with goods inflation reaching 65.7 percent year-on-year, compared to lower—but still elevated—inflation in services. Food and beverage prices rose 5.2 percent in a single month, intensifying concerns over household purchasing power.

The policy shift has coincided with renewed currency volatility. After briefly retreating, the dollar in the open market rose again to around 142,000 tomans, while gold prices surged, with the Emami coin reaching about 159 million tomans. At the same time, localized protests have been reported in recent days, initially triggered by shopkeepers in Tehran objecting to rising costs and the rapid depreciation of the rial. While demonstrations have so far remained limited compared to past nationwide protest movements, they underscore the sensitivity of economic reform amid prolonged inflation and declining real incomes.

Market reactions have been mixed. While households face higher prices, the Tehran Stock Exchange has rallied sharply, driven largely by export-oriented companies expected to benefit from more realistic exchange rates. Analysts say the shift reduces losses associated with forced currency conversion at artificial rates and improves transparency in corporate earnings, making export-heavy sectors more attractive to investors.

Despite the government’s emphasis on protecting consumers, a number of economists warn that the reform risks undermining production if working capital constraints are not addressed. Economic analyst Seyed Abbas Abbaspour has cautioned that current policies lack a concrete mechanism to support producers, particularly in agriculture and livestock. He notes that the price of key inputs has surged from 15–20 thousand tomans per kilogram to 40, 50, and even 70 thousand tomans, leaving poultry and livestock producers without the liquidity needed to continue production. According to this assessment, when producers lack working capital they are forced to reduce output, a dynamic that mirrors the experience of 1401, when similar shocks led to mass culling of productive livestock, sharp declines in supply, and lasting damage to the sector.

Critics argue that direct payments to households do not flow directly to producers, who must purchase inputs upfront and wait months before recovering costs through sales. Abbaspour and others estimate that 50 to 60 trillion tomans in targeted financing—through preferential credit lines, temporary easing of reserve requirements, or directed lending via state support companies—could help stabilize production during the transition. Without such measures, they warn, higher household subsidies alone may fail to prevent supply shortages and renewed price increases.

Alongside these warnings, the Ministry of Welfare and some economists have offered a more optimistic assessment. They argue that replacing indirect subsidies with direct, per-capita transfers improves targeting, reduces leakage, and gives households greater control over consumption. According to these estimates, direct subsidy payments could reduce poverty by around 20 percent among lower-income deciles, at least in the short term. Supporters of the policy acknowledge production-side risks but contend that poverty reduction and consumption smoothing are critical priorities in an economy grappling with sustained inflation and uncertainty.

Iran’s attempt to dismantle its multi-rate exchange-rate system reflects long-standing critiques of the preferential currency regime and represents a structural correction long demanded by economists. Yet the reform also exposes a central tension in Iran’s political economy: how to protect consumers while sustaining production under conditions of high inflation and financial constraint. Without parallel measures to support producers and manage inflation expectations, the policy risks shifting the burden of adjustment onto households already under pressure. At the same time, failure to reform the exchange-rate system would likely perpetuate the distortions that have undermined economic governance for years. As inflation remains high and protests simmer, the coming weeks will test whether the government can balance consumer protection, production stability, and social trust, or whether the reform will add to the pressures already weighing on Iran’s fragile economy.