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CBI Upholds Market Role in Setting Forex Rates
Economy, Business And Markets

CBI Upholds Market Role in Setting Forex Rates

Governor of the Central Bank of Iran Valiollah Seif Saturday renewed his pledge to allow the market pressure play a key role in setting the value of the rial. Seif criticized moves by the previous administration to manipulate the country's currency, saying it was not in the interest of the national economy.

"The previous administration injected $22 billion into the economy over the course of a year and a half to strengthen the rial. However, we should know that national currencies gain in value and wroth only through jobs and manufacturing," he said in comments posted on the CBI website.

Seif referred to the newly-launched website "sanarate.ir" and claimed that the CBI-affiliated webpage reflected real foreign exchange rates.

His stance in pushing for transparency and a market-based foreign exchange regime comes as CBI steps up efforts to unify foreign forex rates.

Iran reverted to a dual exchange rate system in 2010 when banking sanctions against Iran's nuclear program caused huge volatility in the markets. The rial, which is pegged to the greenback lost 75% of its value in 2013.      

In the dual exchange rate system, the fixed, subsidized rate—offered by the CBI —is applied only to a small sector of the economy, namely essential  imports and exports while the 'free market rate' is used for all other routine transactions and foreign trade.

The dual system is often criticized for favoring special-interest groups in the availability of subsidized foreign exchange, prompting senior monetary officials to announce plans to scrap the controversial dual rate system within six months after sanctions against the country are removed. Iran struck a landmark deal with the major world powers in July to limit its nuclear program in exchange for some sanctions relief.

Predictability and Stability

The top banker said volatility in the foreign exchange market had declined by 54% in the 5 months ending Aug. 22. Pundits have argued that a stable foreign exchange market is crucial for a single-exchange rate system to emerge.    

"It's no source of pride for the government to manipulate the currency," he said. "Instead we should let the market decide."

According to Seif "predictability" is a cornerstone of economic stability which fosters investment and enables policymakers to plan for future.

"An economy in which an unsettling piece of news sends shockwaves throughout the markets and causes forex rates to triple keeps investors and entrepreneurs at bay and encourages speculative activities."  

His dovish remarks in ruling out government interference in forex market echoed those made by G20 finance ministers who vowed on Saturday to avoid depreciating their currencies to gain a competitive trading advantage as the fallout from China’s slowing economy roils international markets and threatens to stall the global economy.

The effort to avert a so-called "currency war" comes on the heels of China’s yuan devaluation last month and as the International Monetary Fund plans to downgrade global growth prospects, warning that downside risks threaten to slam the brakes on output.

Seif also weighed in on inflation, saying the Rouhani government had successfully tamed the inflation rate, bringing it down to 15.5% from a frightening 40% just before taking office in the summer of 2013.  

 

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