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Why Didn’t the Dollar Depreciate after the Sanctions Relief?

11 Apr., 2016

Vistar Business Monitor

Some market players expected the JCPOA would lead to depreciation of the US dollar against the rial; however, during the nuclear negotiations and before the talks resulted, authorities clearly rejected the possibility of a lower rate for the dollar.

Officials even argued that the depreciation of the dollar would not be in the interest of the Iranian economy. Even some institutions loyal to the administration announced that the dollar must be traded at higher rates – between 45,000 and 53,000 rials, an initiative that could have negative effects on the falling pace of inflation. Of note, inflation has been reduced due to contractionary policy of the government. So, the lower inflation has not yet increased the purchasing power of the public.

It is interesting that the experts who, were criticizing the policies which led to weak national currency in the past, are now claiming that weaker rials would be good for the economy. On the other hand, the administration expected to solve all monetary problems through the sanctions relief. It was expected that the inflow of dollars into the country after the SWIFT ban is lifted would help address the shortage of dollars, but in practice nothing particular happened after the sanctions relief.

The administration expected to inject part of the funds blocked overseas into the national economy; but with the Wester side failing to fulfill its commitment, the administration failed to achieve its goal. Every year, when the budget bill is proposed, the government increases the official rate of the dollars in the bill, a measure that has never ended up increasing the public purchasing power.

It seems that the administration and the Central Bank are trying to narrow the gap between the official and unofficial exchange rates by increasing the official rate of the dollar, in an attempt to pave the ground for the implementation of a unified foreign exchange system. Critics wonder why the Central Bank does not act in the opposite way, by injecting more dollars into the market to lower the unofficial rate closer to the official rate. The method the Central Bank has been applied could lead to the appreciation of the rial.

The supply and demand mechanism usually determines prices of goods in the market, with no exception of the forex market. The Central Bank is the supply side and the customers are the demand side, so in Iran it has always been the Central Bank which determines the price of foreign currencies.

Given the administration monetary policymaker who says the value of foreign currencies must increase in accordance with the inflation rate, the administration does not let the US dollar depreciate against the rial, arguing that any loss of the dollar’s value could have negative consequences for the economy. So, even with the release of blocked funds overseas, the Rouhani administration and the Central Bank would not let the dollar depreciate in the Iranian FOREX market.

Due to fluctuations of the forex market in the past years, the moderate administration has been trying to unify official and unofficial exchange rates in a move to stabilize the market. To that end, however, the administration has to save billions of dollars in the Central Bank to implement the unification policy and avoid volatile market reactions. The current administration does not intend to use the saved dollars in order to weaken the dollar exchange rate against the rial. This is a true belief that the administration has to narrow the gap between the official and unofficial exchange rates; however, the administration should gradually stop offering cheap dollars to traders of certain goods. As a result, in the lack of cheap dollars, rent-seeking activities will be discouraged.


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