Unified Exchange Rate: Key to Attract Investors?

Unified Exchange Rate:  Key to Attract Investors?Unified Exchange Rate:  Key to Attract Investors?

The fact that a stable economy grows faster is so pivotal that one of the core principles in economics literature has been shaped around it. It emphasizes that stability improves welfare. In other words, anyone dealing with a stable economy will be better off. No doubt that stability deals with the concept of risk as well. The more stable an economy is, the less risk it incurs; hence the more attractive it is to  investors. Amongst factors that influence economic stability, the one that could be referred to as a dominant factor is the exchange rate.

 “The Rial’s Depreciation” is a frustrating headline for investors and players in Iran’s economy in recent years. It results in lack of a unified exchange rate regime that ends up having potentials for arbitrage in foreign exchange market. The wider the gap between the official exchange rate and the free market rate, the more room is for arbitragers to make use of it. However, this is just one side of the coin. The other side which deals with government policies is setting the exchange rate artificially. As the gap between the two rates turns wider, the risk of facing a considerable exchange rate shock grows. Such risks known as systematic risks in economics are so complicated that cannot be eliminated only by government and monetary authorities. Setting the exchange rate by considering flows of foreign currencies to the home economy and letting the market clear itself could be a desirable policy, which leaves no room for any probable exchange rate shock. Although such policies are time-consuming and usually implemented gradually, the fact that tracking such policy even in a gradual manner is a stabilizing device could not be ignored.

Hopefully, recent exchange rate policies enforced in the Iranian economy, such as  narrowing the gap between the official and the free market exchange rate has been the first step to reach to a unique exchange rate. Such exchange rate policies along with a progressive foreign policy of the current government are good signs of Iran’s economy promising stability to be reached at least in the mid run. Equipped with a stable economy, there would be a clearer outlook for investors who intend to invest in Iran which will be in a win-win situation for all parties.

Arian Aghabeigi works at Donya-e-Eqtesad Research Center.