In a report the Majlis Research Center (MRC) has proposed ways on "Short-Term and Long-Term Solutions to Tame Inflation." The short-term list focuses on minimizing exchange rate fluctuations improving monetary policy governance, and strengthening the role of the central bank.
According to the report, long-term measures should help control the quantity and quality of liquidity, reform the banking sector, make a final decision on troubled banks, improve budgetary structure, avoid imposing state pricing strategies to fight inflation, redefine policies guiding pension funds and reduce rampant liquidity, IBENA reported.
One key proposal is to reduce importers' cautionary demand cycles by introducing new derivative currency instruments. This would demand restructuring the foreign exchange market in its entirety, consolidate official supply and demand at the exchange center without price interference and subsequently establish an efficient reference exchange rate.
The availability of such tools, including currency futures or currency swaps, would help the central bank facilitate the reduction of commercial precautionary demand and prevent exchange rate overshoot.
However, academics and economic experts have cautioned that the successful implementation of the proposed measures demands, among other things, a clear and comprehensive approach plus robust coordination among stakeholders. They stress the role and significance of closely monitoring and reforming the banking industry plus addressing structural defects in the government budgetary framework.
While the proposals offer a roadmap for tackling galloping inflation, its effectiveness will depend on the commitment and timely implementation of the recommendations. As the government considers the proposals, it is crucial to prioritize policy coherence and begin a transparent discourse with the relevant institutions and experts to ensure success.
Recently, Mohammad Reza Farzin, the governor of the Central Bank of Iran, said the CBI has started buying and selling currencies directly, to help accelerate the process of currency allocation.
Struggling to Restore Stability
In a meeting with exporters, importers, and producers Farzin said, "Foreign exchange rate is one of the fundamental issues for the economy…time and effort of the bank and the government is focused on restoring stability," the CBI website quoted him as saying.
Farzin stressed that most of the foreign currency is supplied by exporters, including petrochemical and steel companies.
However, he referred to certain bottlenecks in the currency supply process and expressed the hope that the move to directly buy currency from exporters without intermediaries should produce results. "This approach will reduce costs and shorten the time required for currency procurement."
On recent measures taken by the CBI, he said, was "Allocating currency from the government's reserves for importing essential goods and medicine to [help] restore stability and prevent steep jumps in exchange rates."
The Iran Center of Exchange (ICE) was created to facilitate disruptions in the supply of currency to exporters and importers.
"This center now is the focal point for currency policies and plans are underway to expand its scale and scope by launching futures trading, swap transactions, and utilizing other common tools. The ultimate goal is to provide the necessary currency to the public and businesses through this center."
The CBI in February unveiled the ICE apparently to control forex and gold prices that have jumped to levels unseen in the history of the country.
Rates at the center are said to be reference rates for the market based on demand and supply of currency and gold, as well as key economic indicators.
Farzin this week warned exporters who have failed to return their forex earnings and said a special committee set up at the CBI is investigating the delays.
He concurred that most exporters repatriate their foreign revenue. "Last year, $65 billion was paid [for imports], which reflects the pattern of export revenue repatriation. Most of the forex came from the petrochemical and steel industries while other sectors also performed reasonably well. However, there have been breaches of [currency repatriation] agreements," IBENA quoted him as saying. He did not elaborate or name the defaulting parties.
Farzin earlier informed the Majlis about the CBI’s move to begin buying and selling foreign currency directly to eliminate backdoor deals. This move comes amid reports that some avaricious dealers and companies are involved in illegal forex deals.
"Although this is not widespread, there are reports of some individuals and companies dealing in currency through backdoor channels," the governor told the rare parliament session.
