Economy, Business And Markets

Dual Exchange Rates Awkward

Dual Exchange Rates Awkward  Dual Exchange Rates Awkward

The vicissitudes of foreign exchange market have always been a hassle for businesses and industries that rely mainly on the greenback for foreign trade. To address this problem and safeguard the businesses from the shocks of the currency market, the Central Bank of Iran has taken several measures. The CBI went so far to announce an “official rate” for the dollar back in 2011 which was agreed to be 12,260 rials. The bank even launched an “exchange transaction chamber” a year later to calm the tumult in the currency market.

All this seems to have cushioned the markets against volatility but this has not been the case.  The use of “official rate” never actually caught on, not even finding a place in official transactions. And the last nail on the coffin of the official rate came when the central bank itself began to calculate the exchange rates based on the price of gold in the free market.  

Although the gap between the official rate and the market rate has narrowed since the launch of the exchange transaction chamber, but still the free market greenback is 4,853 rials more expensive that the official dollar worth 28,337 rials on April 26.

 Pros and Cons

Some experts believe the reason for the government to figure out the exchange rate of dollar based on gold is to prevent gold smuggling. But others point to the main role of foreign currencies in facilitating commerce with foreign nations, arguing that protecting gold is not a good enough reason for the government’s policy.    

“According to CBI figures, Iranian imports in the previous year were worth $50 billion, out of which only $20 billion were provided through the exchange chamber and the rest flowed in through the free market”, says Majid Hariri, the chairman of exports at Iran Chamber of Commerce in an interview with IRNA.

He says that a significant portion of the transactions at the official rate has been provisions to Iranians travelling overseas or for foreign medical treatment. “In reality, only 10% of imports have come in through the official exchange rate”.

Hariri says that a dual exchange rate is neither good for exports nor imports, contending that such an exchange rate regime fosters corruption and rent-seeking. “At the moment, importers, instead of eying the yo-yoing  exchange rates, only care about the stability of the market”, he said.

He called for a unified exchange rate system to be implemented, saying if the government wants to subsidize imports of certain goods, it had better allocate the subsidies to “importers” themselves and not just put the subsidies on the exchange rates for those commodities. “By doing so, exaggerated requests for cheaper dollar for imports would be eliminated and more economic transparency ensured”, Hariri maintained.