C reating a bourse for trading foreign currencies is the talk of the town these days. Pundits argue that such an exchange would bring about transparency, but there are critics who say such an exchange is unnecessary.
A currency bourse was also planned during the previous administration. But it was cast aside as Iran’s foreign exchange market plunged into a crisis following the intensification of sanctions against the Iranian financial system in 2012.
In 2010, the UN Security Council adopted resolution 1929, which created a basis for crippling US and European Union sanctions in subsequent years. These included kicking the Central Bank of Iran from the SWIFT global interbank messaging network and freezing Iranian overseas assets.
Iran is on the final leg of talks with P5+1—the five permanent members of the UN Security Council plus Germany—to lift the sanctions in exchange for guaranteeing the exclusive peaceful nature of its nuclear activities. The negotiations are to conclude on July 7.
The sanctions created large fluctuations in rial’s exchange rate and also led to its 70% devaluation in Iran’s currency market. This forced the central bank to adopt a multiple exchange rate regime, meaning the bank offered a rate at a discount to the rial’s market rate for certain segments of the market, such as “essential” imports and exports and current account transactions. The unofficial (market) rate has always been higher than the official one.
“Fluctuations and the multiple exchange rate regime were the main reasons for scuttling the currency bourse plan,” said a member of the parliament, Mohammadreza PourEbrahimi Davarni.
During the former government, the Bourse High Council and Securities and Exchange Organization defined a framework for forming a currency bourse, said PourEbrahimi.
The aim was to bring transparency to a shadowy market and increase government control. The bureaux de change are in a chaotic state. There are over 1,400 bureaux in Iran forming the backbone of Iran’s foreign exchange market. But only 428 are certified by the central bank. The scope and dimension of their situation are such that neither the Judiciary nor the central bank has a clear-cut list of the unauthorized ones.
During the previous administration, the Ministry of Economy approved the proposal for forming a currency bourse, but the former central bank governor, Mahmoud Bahmani, opposed the plan.
According to PourEbrahimi concerns over the implementation of some banking policies was the reason behind Bahmani’s refusal.
But a currency bourse would “bring transparency to rial’s price discovery,” he said. Currently there is no single rate of exchange for each currency in Tehran’s foreign exchange market. Price quotes vary from shop to shop and differences sometimes reach 10% of the quoted price.
Furthermore, it could become a base for the introduction of other financial instruments, like futures options and swaps, into Iran’s foreign exchange scene. These instruments would boost market liquidity and help investors and companies hedge against exchange rate changes.
Also, a currency bourse under the central bank’s supervision could help the bank maintain a unified exchange regime, decreasing economic rents.
Officials have a propensity towards heavy-handed intervention in markets. A market under the thumbs of the central bank could be manipulated and controlled, they argue. Volatility caps and order limits are trends that can be transferred from Tehran Stock Exchange to a currency bourse.
Regardless, a prerequisite for the bourse is abandoning the multiple exchange rate system in exchange for a managed float with capital controls.
The central bank plans to unify Iran’s foreign exchange regime in five to six months when a nuclear agreement is signed between Iran and P5+1, according to the bank’s governor, Valiollah Seif. That would give the central bank ample time to reestablish its links with the international markets.
