Economy, Business And Markets

Instability No More

Instability  No MoreInstability  No More

The government reiterated its vow to keep rial's value stable and prevent currency shocks to the Iranian economy recovering from deep recession.

"Henceforth foreign exchange volatility will be limited," Economy Minister Ali Tayyebnia said on Saturday.

The accord endorsed by a resolution of the United Nations, which limits Iran's nuclear program in exchange for the lifting of sanctions, and the release of Iran's assets frozen overseas, will boost the central bank.

The positive expectations resulting from the deal, coupled with President Hassan Rouhani government's better fiscal standing, have strengthened the government's hand in the foreign exchange market.

The volatile foreign exchange market has finished off many businesses in the past few years. Companies had no way of hedging against foreign exchange risk, as no currency swaps or futures are available in Iran. The country was in deep recession despite windfall oil revenues due to profligate government policies. Inflation ran rampant and financial sanctions imposed over Iran's nuclear energy program limited foreign exchange supply.

As the Central Bank of Iran was barred from the international banking system in 2012, it was poorly positioned to defend the rial and the currency took huge hits in the foreign exchange market. The rial was devalued in two phases, losing over 70% of its value over two year.

The government was forced to adopt a multiple exchange rate regime, whereby the central bank offered two different exchange rates at a discount to the market rate. Due to the bank's limited resources, the official rates were offered only for importing essential goods. Prompting companies to look to Tehran's bureaux de change for their needs, exposing them to the volatile exchange rates.

Now things have taken a turn for the better and the government is doing its best to prevent volatility by trading in the open market and controlling the flow of capital.

"Our notion is to limit foreign exchange volatility, but we cannot give numbers for it," said the minister. "And if anyone gives a number for the appreciation of the rial, they are lying."

"We follow a managed float exchange rate regime. In this system, foreign exchange rates are neither decided by the government nor by the central bank, but via economic forces in the market."