Economy, Business And Markets

Gov’t to Establish Forex Bourse

Gov’t to Establish  Forex Bourse Gov’t to Establish  Forex Bourse

The government is going ahead with its plan to create a centralized foreign exchange market, according to Economy Minister Ali Tayyebnia.

Tayyebnia made the announcement on Monday night although Central Bank of Iran Governor Valiollah Seif said earlier this month that there was no need for a "currency bourse" and that the interbank system would suffice in fulfilling market demand.

"The draft for creating a currency bourse has been sent to the Economy Ministry by the central bank, and the Securities and Exchange Organization is reviewing it," said the minister on the sidelines of meeting of the committee for state and private sector dialogue.

"The SEO has also created a joint proposal with the central bank, which will become the basis for further actions," he added.

Iran is going against the grain in creating the "currency bourse" as the forex market is a decentralized market around the world.

However, due to the weak role banks play in this market—further limited by sanctions that cut Iranian lenders from the global banking system—and the domination of the market by bureaux de change—two-thirds of them unauthorized, the government wants to centralize foreign exchange trading. There are over 1,400 bureaux in Iran's foreign exchange market, but only 428 are certified and regulated by the central bank.

Centralized foreign exchange trading would put the market firmly under government supervision and control, and allow for more regulation and state interference in the market. The move is understandable given the governments' past experience with the foreign exchange market.

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 of Iranian overseas assets.

The intensification of sanctions created large fluctuations in rial's exchange rate. No placatory comments by the governor of the central bank, economy minister, or even the president had any effect. Even a crackdown on investors and traders and attempts to close down trading were futile. The rial devalued by 70% in a year.

This forced the central bank to adopt multiple exchange rate regime, meaning the bank offered two different rates 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 bank started offering one rate later.

Now, with the deal between Iran and the six world powers—putting an end to sanctions in exchange for restraining Iran's nuclear energy program—the government wants to unify the foreign exchange regime and introduce the "currency bourse" in an attempt to increase market depth.

Release of Oil Money

The nuclear deal, named the Joint Comprehensive Plan of Action, will also see to the release of Iran's assets, which were blocked by the sanctions, making many economists concerned about how these assets will be managed.

Tayyebnia said the government will use the assets to boost the private sector.

"The priority for the usage of oil revenues will be the private sector and providing working capital for manufacturers," he said.

Iran has over $100 billion blocked overseas. Iranian officials have given a lower figure, however. Tayyebnia and Seif have put it at $30 billion saying the difference derives from different definitions of the frozen funds.

"Part of these overseas assets exists in dollar terms, but the rial equivalent has already been paid to the government by the central bank. Thus their release will have no effect on state budget," the minister said.

Tayyebnia implies their release would just give the central bank access to its foreign reserves.

Extensive Banking Reforms

Tayyebnia also said banking laws are to be overhauled, calling the current laws outdated. The central bank is working closely with the Economy Ministry over the draft of a new banking law. It is currently in its final phase. It will be sent to the Cabinet soon.

"We want to give it to the parliament for urgent review. MPs have showed eagerness to reform these regulations," he said.

Tayyebnia declined to disclose details of the new law but said the reforms are "extensive". The minister also said a separate draft for non-usurious banking will also be sent to the parliament.  

Cash Handouts

"The government is working meticulously to cut cash handouts to the wealthy," said the economy minster.

"Although the parliament has given permission to use an extra 63 trillion rials ($2.1 billion at central bank exchange rate) for cash handouts, we are having difficulty paying them. This is in part due to the fall in our oil revenues," Tayyebnia said.

The previous administration cut energy subsidies in favor of cash handouts, saying they would be more efficient and cost less for the state. They were wrong on both accounts. The government was indiscriminate between the rich and poor in paying cash handouts and manufacturers were left with high energy bills.

The administration is now attempting damage control by trying to cut handouts to the rich. The president went so far as urging the rich to refrain from accepting handouts, to little effect.