Economy, Business And Markets

The Single Rate Struggle

The Single Rate StruggleThe Single Rate Struggle

Ending the dual exchange rate regime is a professed priority of the Central Bank of Iran. Ever since the landmark nuclear deal was sealed between Iran and the six world powers, the CBI has often said that it wants and will strive for a single foreign exchange rate. Morteza Allahdad, a former head of Iran’s Banking Institution talked about the subject with the Persian-language weekly Tejarat-e-Farda, Financial Tribune’s sister publication.

“The CBI should first carefully assess its foreign currency reserves and demand cycles that will arise in the wake of a rate unification, before going ahead with the (single rate) decision,” he said.

Pointing to the CBI governor’s recent comments in the US about Iran not having full access to its foreign currency assets yet, the analyst said “The CBI had counted on the unfrozen assets as a precursor to unifying the rates, which apparently have not yet materialized.”

Another key factor influencing forex rates is oil revenues, he added. A look at currency rates in Iran over the years shows that when oil revenues are high the government has been able to unify rates, he told the economic journal.

“In times of low oil prices, a parallel and unofficial currency market emerges. In this market, forex rates are higher than the official market and it usually due to rent-seeking and speculative activities,” he explained. Double rates are breeding grounds for rent-seeking for those businesses and companies that have access to official, subsidized dollars, the former banking official stressed.

A floating exchange rate system was established during the tenure of former president Mohammad Khatami (1997-2005) following, but was suspended by his successor Mahmoud Ahmadinejad in 2011.

“Diversifying exports and finding foreign markets for domestically-manufactured goods can help replenish foreign exchange reserves and help in unifying exchange rates.”

  Role of OSF

Allahdad pointed to the role of the Oil Stabilization Fund as a mechanism to help reduce forex market swings caused by fluxes in oil revenues. He, however, criticized the previous government for “unreasonable” withdrawal of money from the sovereign fund.

“The measures by the previous government disabled the proper functioning of the fund and it could not help control fluctuations in the forex market. As a result currency rates soared” to the highest levels in contemporary Iranian history and have stayed there for almost five years.

The national currency, the rial, lost almost 70% of its value in 2012. The rial is currently traded at two rates with one decided by the CBI and the other set by money changers.

Allahdad dodged the issue of what would be a “reasonable” rate in a unified system. Without giving any specific figure, he sufficed by dismissing claims that the current forex rates in the free market should be lowered and come close to the official rates.

“Forex rates should be set in tandem with two factors: first, in accordance with the domestic inflation rate, and second in line with inflation rates of countries doing business with Iran,” he said.

The CBI should first prepare the ground for unifying rates and refrain from announcing a specific time for the move, the journal quoted him as saying. “The CBI should not announce a date for the single rate or make promises on which it cannot deliver. This tarnishes the regulating body’s reputation.”