Mohammad Reza Pour-Ebrahimi, the head of the Majlis Economic Commission has warned against the return of the command economy saying that the country can no more bear with the seemingly unending trial and error policies.
Pour-Ebrahimi said that the consequences of fixing the exchange rate at USD1=285,000 rials is not dissimilar to the controversially subsidized USD1=42,000 rials of two years ago which opened the door wide open to rent-seeking and rampant corruption, SENA quoted him as saying.
"When a producer wants to bring his goods to the market and the government sets the price through its [unwanted] interventions, the profit margin for the investor or producer simply disappears and obviously harms production growth," the MP noted.
Regarding the allocation of cheaper currency for importing basic products, he said the multiple exchange rates in practice lead to rent-seeking and corruption and such approach has done nothing to improve the struggling economy or fight inflation.
"If we want effective stabilization policies, we must define a monitoring framework from the beginning to the end of the value chain, that is until the final product reaches the consumer. Does such monitoring process really exist?"
The governor of the Central Bank of Iran, Mohammad Reza Farzin, has strongly defended the bank's policy of selling the greenback for 285,000 rials to import food and other essential goods, saying that it is to help restore some stability to the tumultuous economy caused by “special conditions and political developments.”
In a recent interview Farzin said that the measure also is aimed at stabilizing the chaotic forex market that has been adversely affected by fear and uncertainty due to the current economic situation. He did not elaborate.
"We need to restore stability to the market. The economy is in an acceptable condition even in these difficult times," he was quoted as saying by the Persian-language newspaper Shahrvand.
He noted that the CBI decided the 285,000 rial-tag for the dollar because an “optimal exchange rate” is one that can contribute to balancing the deficit-plagued government budget. "Unlike in the past, the 285,000-rial rate should [help] ensure that the government's budget remains balanced and that it does not face problems."
Currency rates have jumped to historic highs over the past several months with the embattled rial in free fall. Hit by the rapidly deteriorating economic conditions people seek safe havens to protect what is left of their hard-earned savings.
The CBI decision to fix the dollar at 285,000 rials has been welcomed by some economists who see it as a positive step in the right direction. The policy is expected to create a semblance of stability in the market and possibly curb the unending demand for foreign currency.
Old Policies Irrelevant
However, the Majlis Economic Commission recently called on the CBI to “end the traditional ways to control the currency market” and adopt a leadership role in key factors related to currency issues.
MPs have criticized the CBI and the government for setting fixed rates for currency noting that it violates the law. "In unambiguous terms the law state that the government must manage the currency market with floating rates," one MP said recently.
Despite such and other criticisms, Farzin expressed confidence in the fixed forex rate and urged the people to support it. "We are confident that this policy will help stabilize the forex market and protect the interests of the people. We request the people to cooperate with us in this endeavor.”
In another move, the CBI recently said that it has plans to launch a currency stabilization fund to lift the sagging rial and stabilize the troubled forex market.
The CBI governor said that the fund will intervene if and when necessary to maintain exchange rate stability. The move is one of several being implemented by the regulator to improve the currency market that has seen more than its fair share of turbulence over the past several years.
Another measure will be the establishment of a currency futures market, which will allow for the purchase and sale of forex at a fixed price. This will help make rates more predictable for businesses and individuals, the CBI claims.
Launch of the currency stabilization fund is seen as a significant step in the right direction for the struggling economy. With the implementation of such measures, it is hoped that the forex market will see a semblance of stability and predictability, help foreign investment and boost much-needed growth, the CBI boss said. But few economists were impressed.
