Unifying the Foreign Currency Rates
Mar., 2016
Vistar Business Monitor
Iran had a unified forex rate system between 1991 and 2001 – which was a failure. The Central Bank of Iran, backed by petrodollars, had interfered in the currency market in the past years to keep the rial’s value artificially high. That policy was against interests of exporters as they lost their competitiveness in the global market. In the past couple of years, despite weak oil prices, the CBI continued to pursue that policy in the hope that its assets blocked overseas would soon be released after the implementation of the Joint Comprehensive Plan of Action.
The behavior of the US dollar in recent weeks shows that the difference between official and official rates of the dollar is being narrowed on a daily basis. Of note, the CBI had earlier this year vowed to adopt a unified forex rate system. The policy of the CBI could increase speculative activity in the market, since the forex market is already ready to attract liquidity from other parallel markets due to the recent cut in interest rates. The CBI hopes that the economy would recover soon and manufacturing would be strengthened, making speculative activity impossible in the forex market. The anticipation might be right in the short and mid run, and the policy could lead to a boost in exports as the Iranian goods would be more competitive in the global markets. However, in the long run, the dollar will eventually gain value against the rial as inflation continues to rise.
Although monetary officials obviously support the liberalization of forex rates, the CBI continues to manipulate the rial rate against other major foreign currencies. The new regulation adopted by the CBI would force brokers to announce rates. The policy has affected business of currency brokers in the market. CBI Governor Valiollah Seif claims that brokers are free to trade currencies at competitive rates. He says his bank does not want to take disciplinary measures against the brokers, adding that police are not allowed to interfere in the market by cracking down bureau de change – like what happened in the previous government.
However, he has barred bureau de change from announcing forex rate on websites and social media. Instead, they have been encouraged to publish their rates on the official website of sanarate.ir. This is simply not a right policy as the rates appeared on the Sana website is the average rate of currencies, which cannot be considered as a base for daily trading.
The policy seems to be in line with the CBI’s initial objective to unify the dual exchange rate system, and the regulator is trying to widen its monopoly over the currency market. Meanwhile, in the absence of transparency regarding the rates, the CBI will be able to boost its role in manipulating the rial rate.