Economy, Business And Markets

Forex Rate Dilemma

Forex Rate Dilemma
Forex Rate Dilemma

Unifying exchange rates has once again emerged as a hot topic especially after the ongoing volatility in the forex market. The issue resurfaced after the US dollar crossed the psychological barrier of 36,000 rials in the free market last week distancing itself from the official rate hovering a little over 30,000 rials. The wide gap between the two rates has proven to be grist to the mill of brokers and middlemen always hunting to make an extra buck from market    turmoil.

Mahmoud Ahmadinejad became president in the summer of 2005 and the greenback rose to 9,000 rials. The steady rise of the USD continued its pace reaching 26,000 in 2012 -- a 116.5% growth from the previous year’s 1,204 rials. A turbulent market combined with layers of mismanagement prompted the government to revert to a dual forex rate.

The legacy of the previous administration continues to haunt the Rouhani’s government striving to lift the economy and boost growth, especially at a time when oil prices are taking a hammering unseen for more than a decade.

Issue of the unified rates was pushed to the sidelines and consigned to oblivion until Valiollah Seif, the CBI governor brought up the issue this year. He reiterated last week that unifying exchange rates is among the CBI’s declared priorities and “now conditions are ripe for the move.” He however added that the CBI prefers to wait a bit longer before fixing the long-pending pain.

In the wake of his comments, the news website has carried out a survey asking economists and analysts about the feasibility of unifying exchange rates and the consequences it may have on the economy. Almost all agreed that unified rates would be a welcome sign. However, some cautioned against haste and offered some solutions.

 Hinder Not Help

Pouya Jabal Ameli, an analyst with the Financial Tribune believes that the existing gap between the official and the market rates has made it difficult for CBI to unify them.

“Deciding to unify the rates abruptly and close the 6,000 rial gap between the two rates could do more harm than good,” he said.

Curbing rent-seeking and volatility in the forex market could be a positive outcome of moving toward a single rate according to Ali Khosroshahi, a forex market analyst. He believes that the government will announce unified rates sooner rather than later. Khosroshahi urged the government to take the inflation rate and ground realities of the economy into close focus before moving toward a single rate. “I think the officials will announce a floating rate. Establishing forex bourse is also a measure that can and should make unified rates possible.”

Unified forex rates and a stable hard currency market are among the major demands of businesses and exporters according to Masoud Khansari, head of Tehran Chamber of Commerce. “We all want the greenback rate to be revised. Unified rates will help curb rent-seeking and lead to an authentic market rate.”

Hossein Tavakolian believes that the government should wait for the implementation of JCPOA (Iran’s nuclear accord with the six world powers) and then go for the unification in a more stable economic situation. The market observer said the government’s fiscal policy and CBI’s monetary measures should be compatible to make the single rate a reality.

Seyyed Kamal Seyyed Ali, a former CBI vice governor believes that a single rate system after the JCPOA implementation will encourage foreign investors to enter the Iranian market and the Tehran Stock Exchange.