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Forex Rates will Be Unified Upon Lifting of Sanctions

Forex Rates will Be Unified Upon Lifting of Sanctions
Forex Rates will Be Unified Upon Lifting of Sanctions

An analyst has made the case that with the lifting of sanctions, foreign exchange rates will be unified and the major foreign currencies—notably the US dollar—would even appreciate against the rial since a stronger rial would not benefit the economy.

“Once the sanctions are relaxed, the exchange rate system will rapidly change to a unified regime,” Hossein Abdoh Tabrizi, who is a member of the High Council of Exchange Market, said, as reported by IRNA on Thursday.  

“If a nuclear accord is struck, the effect on markets will mostly be psychological this year and since the real value of the dollar is higher, we cannot expect the rate to decline,” Abdoh Tabrizi contended. The reason for foreign rates remaining at the current low level is the “speculative activities” of dealers, he added.

 Recipe for Ending Corruption  

Also at the forum, several analysts and economic officials issued grim warnings against the many dangers and drawbacks of a dual exchange rate system. The forum’s participants unanimously called for the adoption of a unified exchange rate to eradicate the corruption and nepotism that has evolved around the current system, IRIB News reported.

Abdoh Tabrizi added that exchange rate unification is a necessary step that will not harm the economy in the least.  

“Under the current circumstances, the government cannot obtain foreign currency directly and instead has to import goods from India, South Korea and China. Since the US dollar has different parity rates in different countries, a multiple exchange rates system is having negative effects on the Iranian economy,” the expert said.

He insisted that a unified exchange rate would in no way harm the economy and said a lower cost in transactions would be the direct benefit of the initiative.  

The history of a double exchange rate system goes back to 2011 when the currency crisis reached its peak. To protect the market against further shocks, the CBI announced an “official rate” for the US dollar, which was agreed to be 12,260 rials at the time. The bank even launched an “exchange transaction chamber” in 2012 as an additional measure.

However, the measure did little to stabilize the market and the use of “official rate” never actually caught on, not even in official transactions. The rial is currently traded at two rates with one being decided by the CBI and the other set in the bureau de change market. The market rate is subject to fluctuations almost on a daily basis.

Akbar Torkan, President Hassan Rouhani’s chief advisor and secretary of Iran’s High Council of Free Trade and Special Economic Zones, also railed against the current dual exchange rate regime, saying it is one of the “cornerstones of corruption” as the official dollar rate is 28,500 rials but its unofficial rate is 33,500 rials.

“Some goods are imported at the official exchange rate and then sold at the market rate or even higher, and this paves the way for gains of billions of rials by rent-seekers,” Torkan warned.

“The adoption of a single-rate regime would lead to more transparency in the economy, commerce, exports and imports.”

 Massive Windfall

Mohammad Hassannejad, a member of Parliament’s Economic Commission estimated that over $1 billion are being earned by rent-seekers who have access to subsidized, official-rate dollar.

He said: “The Parliament has tried in recent years to help nudge the government closer to a unified exchange rate system. And although this may have some inflationary effects in the short run, it will boost manufacturing in the long run and part of this $1 billion windfall could be allocated to manufacturing.”

“We should move toward a unified exchange rate system so that transparency of our country will be determined accurately and economic planning will also gain new momentum,” he added.

The lawmaker said the number of importers, who are abusing the dual exchange rate system and pocketing massive gains through corrupt methods, could barely be 1,000.

 Tug-of-War

Yahya Al-e Es’haq, a member of the Chamber of Commerce Representatives Committee, opined that due to several reasons, foreign currency in Iran is costlier than in other countries, noting that the Iranian economy is also excessively reliant on foreign money.

“Foreign exchange rate relates to both manufacturers and consumers and a rise in the major currencies’ value is beneficial in one place and disagreeable in another,” Al-e Es’haq said.

“The exchange rate should be at the optimal point for the key players so that importers, exporters, the government and consumers feel at ease.”

While acknowledging that a dual exchange rate leads to corruption, Al-e Es’haq argued that if essential commodities are imported at the market exchange rate, a large segment of the society would incur losses.

“Although it is important that supply and demand determine the value of foreign currencies, a regulated market can protect the economy against fluctuations,” he maintained.

Other commentators also rooted for a unified exchange rate, which they said would support domestic manufacturing and the job market. 

Financialtribune.com