Economy, Business And Markets

USD Rate in Budget Bill Criticized

USD Rate in Budget Bill CriticizedUSD Rate in Budget Bill Criticized

The government has reportedly set the rate of the US dollar exchange rate in the 2016-17 draft budget law at 29,997 rials which is slightly higher than this year’s 29,850 rials. To the surprise of many, the reported rate is even lower than the existing official rate of 30,110 rials and this is while the government is authorized to increase the official rate by 10% every year.

The news has unleashed a wave of criticism at the government from analysts and economists who believe any rate below 30,000 rials is unrealistic and indicates reluctance on the part of the Tehran government to unify forex rates. Analysts also see the rate decision as yet another “sign of inconsistency between the policies set by the government and the Central Bank of Iran,” website reported.

Considering the inflation rate in the US– which is around 1% - the scientific basis for calculation of a given foreign currency rate - the rate for the green back in next year’s budget should not be below 33,000 rials, the analysts say.

Such a rate could help keep hopes alive for an eventual and long-awaited single rate in the market by next year as it is now only lagging behind the market rate by 6,000 rials.

On the “logical rate” for the greenback, Bahuddin Hosseini Hashemi, a senior market analyst, proposed a rate between 33,000 to 34,000 rials and said “Any other rate below the market rate would be unrealistic.”

He stressed that the dollar’s exchange rate should be treated as “floating” both in the open market and in the inter-bank network and regretted that “The government annually sells its resources 90 trillion rials ($3 billion at the official exchange rate) cheaper by ignoring the logical forex rate and, by extension, providing grounds for rent-seeking.”

Hashemi played down the risk of an economic shock as a result of unifying exchange rates, and said, “Announcing a unified rate may shock the market for a few days… but it will bounce back and with a forex rate bull run would lose momentum.”

The analyst predicted that by March 2017, the American currency would jump to 40,000 rials in the free market from the present 36,500 and warned “If the government fails to set the exchange rate at 33,350 rials for next year, automatic depreciation of the rial, which is a natural result of the difference in inflation in Iran and the US will raise the greenback to as high as 41,400 rials in the parallel market.”

Hasan Motamedi, CEO of Eghtesad Novin Bank, also backed the rate of 33,000 - 34,000 rials for the dollar as “realistic” for next year’s budget but said “The forex rate set in the budget law is simply a hypothetical rate which is unlikely to be realized.”

He expected the rate to fluctuate next year in tandem with inflation and said “The proposed rate of 29,970 rials will not be realized even if the government unifies the exchange rates.”