Economy, Business And Markets

Forex Bourse and Wishful Thinking

Post-Doc and Teaching Fellow at Alzahra University
Forex Bourse and Wishful ThinkingForex Bourse and Wishful Thinking

Despite the Central Bank of Iran Governor Valiollah Seif having said that there is no need for a currency bourse, the government seems unmoved. It has been pushing for a centralized foreign exchange market which was rejected by Parliament in May 2013.

Abolghasem Hakimi, a senior economist considers is of the opinion that a forex bourse would help determine the hard currency rates based on supply and demand and says the ostensible objective of setting up the bourse is to reduce fluctuations in exchange rates, IRNA quoted him as saying.

However, he acknowledged that the initiative, which would be modeled on practices in the developed world, may involve risks for a single-product economy like Iran.  He strongly supports the idea that the CBI is resolved to adopt some workable “strategy to prevent future turmoil in exchange rates like the one that rattled the markets in 2012.”

It is not clear how a centralized bourse under government supervision could possibly prevent fluctuations in exchange rates. Blaming the role and influence of the bureaux de change and the rent-seeking creed is hardly a justification for establishing a forex bourse.

 As long as the ministries of oil and economy continue supplying foreign currency to the CBI, its supply will be intertwined with volatile international oil prices and government decision on how to distribute the foreign exchange earned from exports.

Given the volume of oil export earnings and government addiction to this dangerous pattern, creating some new market which will determine exchange rates can at best be described as wishful thinking, at worst as a delusion.

If the market economy is to deliver, it should rely on everyday demand and supply. The only way to mitigate the government’s iron-clad grip on the foreign exchange market is by strengthening the private sector’s role in the market.

Creating a forex bourse is not expected to change the supply landscape; rather, it is likely to stoke demand and harmful speculative activities. If investors gravitate toward the forex market, exchange rates will obviously rise further and harm the ability of the already struggling banks to lend to manufactures long beset by crippling shortage of working capital.

Higher exchange rates could be a remedy for government’s budget deficits precipitated by declining oil prices. The government can also be tempted to champion the forex bourse as a boon to non-oil exports but it should be wary of its potential in stoking inflation.