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Ambiguity Over Fixed or Floating Exchange Rate

Ambiguity Over Fixed or Floating Exchange Rate Ambiguity Over Fixed or Floating Exchange Rate

Last week’s remarks by top monetary and financial officials at the 25th Annual Conference on Monetary and Exchange Rate Policies led to ambiguity over the exchange rate policy of the government.

Valiollah Seif, the governor of the Central Bank of Iran (CBI), has emphasized on the implementation of a unified exchange rate only after the international banking relations of the country normalize, according to Financial Tribune sister website Eghtesad News. He believes a unified exchange rate system puts an end to corruption and rent-seeking activities but has not clarified whether the exchange rate, if unified, would be a floating or fixed one.

At present, foreign currencies are traded at both official and unofficial rates in Iran.

Ali Tayyebnia, the minister of economic affairs and finance, who also supports the idea of unification of exchange rates, prefers a floating rate.

“The world has come to the conclusion that a floating exchange rate, and not a fixed one, can increase the central banks’ control over the money supply,” he said.

Divergent opinions of the two officials surfaced last December when the draft budget for 2015/16 fiscal year was submitted to the parliament. At the time, the financial policymaker said, “To me, the exchange rate is already unified considering the costs imposed on the official exchange rate compared with the market rate.”

However, the monetary policymaker said in a speech that the unified exchange rate system can be implemented “only when international banking transaction is possible.”

“This means it will take months to implement the plan as Iran and six world powers are yet to reach a deal over Tehran’s nuclear energy program, though the two sides’ negotiations are in the final stage.

Citing Reza Veiseh, an official in the Presidential Office, the website said, “Whenever authorities intervene in the forex market, a crisis happens.” He regretted that such an incident has repeatedly happened over the past three decades.

 “Thus,” he argued, “the administration is determined to leave the decision to the market to set the rate.”

Financialtribune.com