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What Direction Will the Iranian Rial Go in 1397 (2018)?

15 Jan, 2018

Amir Naghshineh-Pour
Vistar Business Minitor

Fixing the FOREX rate in the budget and its outlook in the year to come has been one of the most controversial questions on the economic front. The government seems to have a long way to go before it can integrate and realize a single foreign exchange rate, economic players are still waiting for it, though.

The FOREX rate has been fixed at 3,500 tomans in the 1397 budget (which starts March 21, 2018). However, experts say that the rate should be fixed at around 4,000 tomans based on the realities associated with the Iranian economy.    

Both the government and the Islamic Consultative Assembly, which have formulated the budget bill, and of course the Central Bank of Iran know that the rate fixed in the budget is not in conformity with the current status of the Iranian economy. By fixing unreal FOREX rates in the budget bills, governments usually try to underestimate their budget deficit. As for the current government, the budget deficit is much more than what is announced. It is hoped that the dollar rate is corrected in the spending package by the parliamentary committee that supervises the budget bill.

Generally, the FOREX rate is not fixed in the budget. It is calculated based on accounting techniques and the amount of oil revenues the government has envisioned for itself in the budget. The FOREX rate was projected to be 3,200 tomans in the budget bill of 1396, but today the Central Bank is selling each dollar at around 3,500 tomans. So we come to the conclusion that the figures reflected in the budget cannot serve as a basis for the Central Bank to act upon. These figures are used in government accounts or in customs offices as reference. What is envisioned in the budget as the foreign exchange rate is not a determining factor. What happens in reality is a far cry from what is envisioned in the budget.

An upward spiral of unofficial FOREX rate in the free market toward 4,400 tomans has raised the possibility that the government has finally decided to unify the forex rate by allowing it to surge toward real figures. There is a gap of 700 tomans between the unofficial forex rate and the official exchange rate which is almost 3,500 tomans. There is a long ways to go before this gap can be narrowed. That’s why the integration of foreign exchange rate seems to be a distant possibility by the end of 1397 (the year to March 20, 2019). 

Based on information available, currently the official FOREX rate is used in 60 percent of the imports, and the remaining 40 percent is done by the unofficial rate. In light of the fact that the difference between the official and unofficial FOREX rates is somewhere in the neighborhood of 600 tomans, those using the official rate are projected to reap around 16 trillion tomans a year..

If the government puts in place the integration of FOREX rate in the next year’s budget, a two-rate dollar will become history. Experts say that the government seeks to assist some economic sectors by allocating official exchange rates to them, but the solution does not lie in allocation of official rates to some and unofficial rates to others. Such a practice will overshadow transparency.

Economic players hold that transparency needs to be injected into the foreign exchange rate fixed for 1397 budget and that the path to transparency goes through a unified FOREX rate. If the government wants to keep a two-rate FOREX in place and not introduce a unified FOREX rate, it is expected to fill the gap between imports based on official rates and imports based on unofficial FOREX rates. An import system split in two – 60 percent based on official rates and 40 percent based on unofficial rates – will give rise to economic rent and this comes with ambiguities which need to be removed.

What is clear is the fact that the FOREX rate is still at a crossroads: whether it should be offered in two rates or it should be unified. The government and the Central Bank have tried in previous years to offer a single FOREX rate, but they have failed so far to set the stage for it. They are perhaps concerned about the consequences of such a decision, but economic players believe that integration of foreign exchange rate is a path the government has no other choice but to set foot on at long last.



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