Economy, Business And Markets

Forex Unification Within 6 Months of Nuclear Deal

Forex Unification Within  6 Months of Nuclear Deal Forex Unification Within  6 Months of Nuclear Deal

The central bank will unify Iran's foreign exchange rate regime in five to six months after the nuclear deal, said the bank's governor on Sunday.

"The best time for unifying the foreign exchange regime is when our connection with international banks and brokers is reestablished," Valiollah Seif told the press.

Many experts confirm that the central bank will have to unify foreign exchange rates after sanctions are lifted if it seeks a stable currency market.

Seif has said time and again his bank is preparing to drop the dual exchange rates in favor of a managed float once a nuclear agreement is signed between Tehran and the six world powers.

Iran is under sanctions by the United Nations, European Union and the United States over its nuclear energy program. It is now negotiating with P5+1—Britain, France, Russian, China, the US and Germany—to reach a comprehensive, final deal before a June 7 deadline, that would limit Tehran's nuclear program in exchange for sanctions relief.

Iran reverted to a multiple exchange rate system following the intensification of sanction in 2010, which barred the central bank from its overseas assets, and made it impossible for the bank to stabilize the rial.

In a dual exchange rate system, there are both fixed and floating exchange rates in the market. The fixed rate—offered by the central bank—is only applied to certain segments of the market, such as "essential" imports and exports and current account transactions.

Meanwhile, the price of capital account transactions is determined by a market driven exchange rate. In Iran the market rate is decided by bureaux de change, mainly situated on Tehran's Ferdowsi Street.

The Defining Rate

Seif repeated his statement on which of the two rates would be the rial's exchange rate upon unification, giving cues but avoiding a direct answer.

"There is an exchange rate reflecting economic equilibrium that cannot be artificially changed. The central bank's duty in this regard is preventing temporary shocks," said the governor.

"We are in a stable condition, but rial's exchange rate is likely to appreciate after the unification."

Most analysts expect the foreign inflows after the nuclear deal to strengthen the rial.

The governor had cued reporters on the bank's position on June 30, saying: "The foreign exchange rates will be defined based on equilibrium price, which is determined based on demand and supply rather than top-down directives."

A Currency Bourse

There have been talks of creating a bourse for trading foreign currencies isolated from the international forex market.

Seif has not been warm to the idea, saying a market like that would serve little purpose.

"Due to the current stability in the foreign exchange market, setting up a currency bourse will have little effect on market exchange rates," he argued.

The governor said the interbank market will be the main reference for currency exchange in the unified system.

"Banks will be the main participants in the foreign exchange market as is customary around the world. Of course, a currency bourse will help by offering foreign exchange futures contracts."