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Expert Calls for Floating Forex Rate

Expert Calls for Floating Forex RateExpert Calls for Floating Forex Rate

Hossein Abdoh Tabrizi, advisor to the minister of Roads and Urban Development for financial affairs, called on the government to deregulate foreign exchange rates instead of applying a fixed exchange rate policy, as central bank is weighing when to unify the official and market rates.

“With regard to Iran’s strengthening economy and private sector development in recent years, a dual-exchange rate system would face more difficulties in terms of implementation since it helps provide ground for financial corruption,” IRNA quoted him as saying.

Abdoh Tabrizi noted that we should make distinction between the “unified exchange rate policy” and the “fixed exchange rate policy”.  To fix the US dollar’s value at 33,000 rials for a relatively long time, special circumstances need to be provided, he added.

The former secretary-general of Tehran Stock Exchange believes 5% inflation or lower is a prerequisite for the prosperity of adopting a fixed exchange rate policy. “However, lowering inflation to 5% seems infeasible in the short run.”

“If the administration aims to let the currency fluctuate only in a limited range of volatility, the inflation rate needs to decline below 10% to help the regulator bring relative stability in foreign exchange rate market,” he added.  

However, as inflation is hovering at 15%, the official regards the fixed rate policy ineffective since it would decrease export to a large extent, encourage import and disrupt relative rates.

“If inflation is expected to maintain over 12% for the next two years, then the foreign exchange rate needs to gradually increase in a managed float exchange rate system,” he stated.

In a managed float system, central banks intervene only periodically, not necessarily to support the national currency but rather to stabilize volatile fluctuations in foreign exchange rates.

He said as lifting of sanctions would facilitate currency transfer between Iran and other nations, the currency market needs to move towards a unified exchange regime. To that end, the gap between official and market rates should be narrowed.

“To adopt a unified system, the Central Bank of Iran aims to present appropriate guidelines within the next few months,” he said, referring to the CBI governor’s anticipation to unify currency rates in the next eight to 10 months.

Financialtribune.com