Iran’s economy has transitioned from one administration to another and all of them attempted to control the foreign exchange rates against the rial using trial and error in policymaking.
Almost all the heads of the central bank that faced the currency crisis resorted to the same methods, despite knowing the failure of these policies in the previous administrations. It is as if there is no other way to manage the exchange rate in Iran, except by repeating the botched policies of the past. As a result, the vicious cycle of foreign exchange market policy is being repeated over and over again.
Kamran Nadri, an economic expert, prefaced his write-up for the Persian daily Jahan-e Sanat with this note. A translation of the text follows:
These days, the foreign currency market has suffered the fate of the past years; yet it is treading the same old path. The foreign exchange market has become a prisoner to the psychological atmosphere created by the government’s policies; the exchange rate is now above 580,000 rials per US dollar [updated since this article was published a few days ag,o as the rial’s devaluation continues on a daily basis].
This is not the outcome of economic realities; the political, psychological and inflationary expectations of the economy have also played a significant role in worsening this rate. Although the policymaker should be able to manage the rising expectations and the psychological climate of the forex market, they are moving down the same old path and repeating the same failed policies.
Despite attempts by government officials to denounce open forex market rates as unrealistic, this rate alone matters to the people, affects the economy and spearheads the trend of prices in other markets
Policing the forex market and labeling trade transactions as smuggling remain on the agenda of the government, which policy has past precedents. The previous governors of the central bank had also said that they only recognize the rates announced by themselves and that the open market rates are “unreal”. Take the example of former first vice president, Es’haq Jahangiri, when the government set the US exchange rate at 42,000 rials in the fiscal 2018-19.
The fact that government officials regard open market transactions as smuggling is perhaps part of their plan to control the exchange rate. But experience has shown that legal action taken to deal with traders has led to a sharp increase in currency price.
Despite attempts by government officials to denounce open forex market rates as unrealistic, this rate alone matters to the people, affects the economy and spearheads the trend of prices in other markets. Despite the low number of open market transactions, the rate determined in this market is the basis of prices used in the economy. Therefore, even though this rate is not official from the viewpoint of the government and does not have any credibility, the open market rate determines the future of the country from the perspective of economic players.
If the policymaker was capable of meeting more needs of the official markets, using new titles every day, via the announced rates, it is possible to shift the trend of the open market and direct it to the path of price reduction. But if speculators and professional forex traders predict that the government is unable to maintain the rate it has determined in a certain range, the speculative attacks in the open market will start aggressively and this will intensify volatility in the forex market.
