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Plan to Create Currency Bourse Raises Controversy

Finance Desk
Plan to Create Currency Bourse Raises ControversyPlan to Create Currency Bourse Raises Controversy

As plans to launch a currency bourse loom closer, proponents and detractors of the proposal are growing more vociferous in defending their views. Advocates argue that such a move would promote transparency in the foreign exchange market. On the other hand, there are those who say creating a currency exchange market would be unnecessary at best and highly disruptive at worst.

Securities and Exchange Organization’s CEO Mohammad Fetanat has said the currency bourse would mainly focus on currency futures and other derivate contracts. Fetanat added that these kinds of trades would have no substantial effects on forex rates and is mostly a safe haven for currency risk management.    

In an interview with ICANA, Parliament’s news website, Ezatollah Yousefian Molla , a lawmaker, has  spoken strongly against the initiative, saying it has the potential to trigger a “financial disaster” in the country. Yousofian who serves on the Parliament’s Budget and Planning Commission, expects turmoil to return to the forex market once a currency bourse is launched.    

“Trading in a stock market has been accepted as the norm since it could lead to a unified price for commodities, but a currency bourse would transform the foreign currencies into commodities and that would have dire consequences,” Yousefian warned.

A currency bourse was planned during the previous administration. But it was later rebuffed as Iran’s foreign exchange market suffered a crisis following the intensification of sanctions in 2012 that sent the Iranian rial plunging to a record low. This prompted the central bank to adopt a dual exchange rate system to protect the market against further shocks. This led to a discrepancy between the official, subsidized rate and the more expensive market rate, encouraging speculative activities and even corruption.

Supplanting a double-exchange rate system for a unified one has been mentioned as a prerequisite for launching a currency bourse. Central Bank Governor Valiollah Seif announced this week that the bank would take steps to unify the exchange rate system within 6 months after a nuclear deal between Iran and the P5+1 is signed.

Iran and major powers have given themselves at least until Friday to negotiate an agreement on the Iranian nuclear program, but a source from one of the powers told Reuters on Tuesday they had to wrap up in the next 48 hours. If a deal is struck, all nuclear-related sanction against Iran, including expulsion from SWIFT system, will be removed.

 

 Bone of Contention  

While a dual rate exchange regime has been panned as a system that leads subsidized greenback to stream into the hands of a select few, Yousefian argues that a currency bourse will likewise give rise to exaggerated demand for foreign currencies which will ultimately end up in the hands of a wealthy clique.  

The lawmaker called on the government to find a more effective remedy for the foreign exchange market.

Other detractors point to the fact that launching a currency bourse is an initiative unheard of in other parts of the world,  and warn that it could be  particularly damaging to a country  saddled with sanctions struggling to muster enough foreign currency for its transactions.    

Proponents, however, are standing their ground by pointing to the many upsides that currency futures contracts can deliver.

 With currency futures, the price will be determined when the contract is signed, just as it is in the forex market and the currency pair is exchanged on the delivery date, which is usually in the distant future.

Thus, currency future contracts allow investors to hedge against foreign exchange risk. Investors who possess foreign currency who want to spend in rial can also benefit from these provisions.

Financialtribune.com