Multiple foreign exchanges rates in Iran is one of the main drivers of inflation in the country, the director of the International Monetary Fund’s Middle East and Central Asia Department said.
The IMF expects inflation in Iran to rise further this year and called for reforms as the economy recovers from the coronavirus crisis. Inflation is expected to rise to 39% this year from 36.5% last year, the IMF has estimated.
Pointing to higher inflation forecast, Jihad Azour said the country needs to first address the issue of multiple forex rates system, Reuters reported.
“To address the issue of inflation it’s important to address the issue of the multiple currency regime that exists in Iran, and this is something that would help not only address inflation but also improve the overall macroeconomic stability.”
The Iranian rial official rate is set at 42,000 to the US dollar, but the market rate is around 250,000.
The Central Bank of Iran in 2019 set up another currency trade platform, known as Nima (local acronym for Integrated Forex Deals Systems) where exporters sell their currency earnings to companies importing non-essential goods. Nima currency rates are usually lower than in the open market but higher than official rates. A dollar is now worth 229,000 rials at Nima.
Apart from the three forex rates, currencies are quoted differently by exchange shops working under CBI auspices to regulate currency rates.
A regulated forex market also exists operated by selected exchange shops and banks dealing in wholesale forex trade.
Successive governments in Tehran have intervened in the currency market and as a matter of policy stuck to multiple rates to prop up the national currency. However, the efforts have been in vain.
The dilemma of multiple exchange rates is a decades-old frustration for manufactures, businesses, economists and academia who have repeatedly urged the governments to end subsidizing the scarce forex (1 USD=42,000 rials) for imports, namely for basic goods. The highly controversial policy has led to rent-seeking and rampant corruption that the state has tried but failed to control.
Iran has been hit hard by the Covid-19 pandemic and economic pressure has intensified and added to the pain inflicted by the US economic blockade.
The IMF last October estimated that Iran’s economy would shrink by 5% in 2020 but later revised upwards its estimate to a 1.5% growth in 2020 and a 2.5% growth this year, it said in its World Economic Outlook report last week.
“Going forward it’s important to start dealing with some of the weaknesses that exist in the economy,” Azour said.
He said improving financial inclusion, reforming the financial sector and state-owned enterprises should be a priority, as well as providing more space to the private sector, which would help create jobs.
Loan on Hold!
Iran asked the IMF last year for $5 billion in emergency funding to help it fight the coronavirus outbreak. Azour said the request was still being studied “in order to get the necessary information to assess the balance of payment need and also the repayment capacity and debt sustainability.”
The government in Tehran says the loan request has been denied by the global lender due pressure from the United States, the largest shareholder of the bank, which is said to have an “effective veto” over IMF policy.
Recalling the US’ antagonistic influence in IMF's unacceptable bias against Iran, the CBI boss Abdolnasser Hemmati earlier pointed to an "administrative note of Oct 15, 2020" based on which "the executive manager of the US in the IMF was instructed to oppose Iran’s loan request.”
