A currency exchange bureau worker counts U.S. dollars in downtown Tehran on Dec. 21, 2011. The U.S. dollar teetered near the 20,000 rial mark for the first time since last January, and Iranian officials began to discuss ways to stabilize the currency market. (Vahid Salemi/AP)

As Iran struggles with a plummeting exchange rate and soaring prices, the currency bazaar in Tehran’s old city center has become the focus of a debate about how to solve the country’s financial woes.

Iranian authorities never took much notice of the traders at the bazaar — which feels like something between a stock exchange floor and an off-track betting center — until the difference between the central bank’s official rate for dollars and the street rate began to widen, lowering confidence in the rial and greatly increasing the amount of currency being traded on the unofficial market.

The first big hit to the rial came in September 2010, when the government announced that long-standing subsidies on basic goods would be ending. About the same time, early rounds of international sanctions designed to persuade Iran to give up its nuclear-enrichment program were implemented, prompting the currency to weaken in value, from 10,500 to 13,000 Iranian rials to the U.S. dollar over just one week of street trading.

Then late last week, as the most punishing sanctions to date were being implemented, the dollar teetered near the 20,000 rial mark for the first time since January, and Iranian officials began to discuss ways to stabilize the currency market.

Proposed responses to the currency crisis have varied widely, including threatening speculators with the death penalty. In recent days, though, the conversation has centered on what steps the state should take to calm public concerns and bring balance back to the currency market. These have included suggestions of a floating rate that would vary based mostly on the price of oil, and a populist plan to establish multiple exchange rates depending on the type of imported good the money is used to purchase.

In an attempt to persuade Iranians to buy dollars from only licensed currency shops, Finance Minister Shamseddin Hosseini warned last Wednesday about the growing presence of counterfeit currency in Tehran. “We are worried about the presence of excitable and inexperienced traders in the professional currency market,” he added.

The street market for foreign currency used to serve mostly businessmen preparing to travel abroad. Having large quantities of dollars didn’t make much sense for others until last year when sanctions made it impossible to transfer money from Iran to foreign banks.

These days there is only a limited supply of dollars at the central bank rate of 12,260 rials, available only to individuals traveling abroad and well-connected companies involved in importing.

Foreign currency speculation has become wildly popular here, as dollars are one of the few investments besides gold and real estate that Iranians deem stable. On Saturday, the price for one U.S. dollar at the Tehran currency bazaar was 19,600 rials.

And because such large amounts of currency are traded at the bazaar, it has become the unofficial, but widely accepted, source of foreign currency rates in Iran. The falling value of the rial has an immediate impact on prices across the country, as retailers set their prices based on the replacement costs of goods, which they know will be much higher as those goods are bought with foreign currency.

Prices on nearly everything in Iran have been rising quickly since the subsidy reforms were introduced in December 2010, but the increases have become alarming with the most recent round of sanctions.

Traditional bread that two years ago cost 1,000 rials ($.05) now costs more than 10,000 ($.50) in some parts of Tehran. A kilogram of meat now costs nearly 300,000 ($15), and most Iranians earn less than the equivalent of $500 a month.

‘We’re not educated guys’

Dozens of men of various ages gathered Saturday at the 19th-century open-air shopping arcade in an old commercial neighborhood of Tehran, listening as prices were called out from various corners of the forex market.

When trading began, one party sold $5 million, immediately bringing the going price down about 200 rials (or $.01). That price was then circulated by phone, text message, e-mail and word of mouth.

Traders at the bazaar estimate that more than $100 million is traded there each day. Indeed, many regular traders carry with them several hundred thousand dollars in crisp, new $100 bills, which they wave in the air to indicate they are ready to deal.

If the tiny alley is Iran’s heart of foreign exchange, its arteries reach out in all directions, affecting commerce across Iran as changes in the rates of the dollar and other international currencies emerge throughout the day.

But Iranian officials are increasingly arguing that this is too much power for an illegal but tolerated group of middlemen to wield.

As one trader in the bazaar who refused to give his name remarked: “Look at us. We’re not educated guys. We just know how to use a calculator.”

The bazaar was closed down in January on the heels of the first massive slide in the rial’s value, driving the currency trade temporarily underground. When the bazaar was reopened several weeks later, little had changed beyond a more conspicuous presence of plainclothes security officers. Activity has returned to normal, but with the latest round of threats of greater regulation, the relaxed feeling may be short-lived.

Proposed solutions

One plan put forward last week is the creation of a tiered system for foreign currency, like one once used in Venezuela, with dollar prices assigned to the type of good they are being used to import. The scheme, proposed by Arsalan Fathipour, head of the parliament’s Economic Commission, would divide all goods into three pricing categories.

For imports of basic necessities such as food, the dollar price would be the official central bank rate, which is currently 12,260 rials per dollar. Intermediate goods, which would include machinery and equipment used for domestic production, would have a higher rial rate. A third, even higher rate would apply to luxury goods, especially foreign automobiles and electronic imports.

“Even if we consider 50,000 rials for luxury goods, though, it’s not important, because our priority is to provide the basic needs of people, not to import luxury items,” Fathipour explained.

This system appeals to those who would like to see greater regulation in Iran’s economy, including many members of parliament attempting to satisfy their poor constituents. But it is being met with heavy resistance from statesmen who have long promoted the private sector, including former president Ali Akbar Hashemi Rafsanjani.

Mohammad Reza Farzin, head of the National Development Fund and the man in charge of Iran’s controversial subsidy reform program, told the semiofficial Iranian Students’ News Agency last week that he does not approve of multiple rates because they “increase economic corruption and decrease clarity.”

Some analysts of Iran’s economy say the multi-tiered rate system may be the Islamic republic’s only option. Djavad Salehi-Isfahani, an economics professor at Virginia Tech, said that “a two-tier system is inevitable when you have sanctions and capital flight.”