Economy, Business And Markets

Single Forex Rate Comes With a Caveat

Single Forex Rate Comes With a CaveatSingle Forex Rate Comes With a Caveat

Deputy governor of the Central Bank of Iran for foreign exchange affairs called the establishment of correspondent banking relations and international ties an important prerequisite to the single currency rate.

Speaking at the 26th annual Conference on Monetary and Exchange Rate Policies, Gholamali Kamyab referred to settling on a way to reimburse currency future contracts, tightening monetary policies, reducing the rate of inflation, improving fiscal discipline and reducing the budget deficit as other measures to unify forex rates.

"Lifting the restrictions on the country's financial assets overseas and diversifying the sources of hard currency earnings are other important factors that will contribute to the single rate."

Compartmentalizing the exchange rate regime into three groups of fixed, multiple and floating rates, Kamyab said the preferred system for Iran is the "managed floating rate" according to which "monetary officials try to steer the exchange rate toward desired targets by controlling the supply and demand and occasional intervention in the market," the CBI website reported.

The official said exchange policy and monetary policy are in fact two sides of the same coin. "Monetary policies affect the exchange rate by making changed to the money supply, creating a shift in the growth of liquidity and interest rates or modifying the circumstances under which loans are made available."  

Before exchange rate policies are finally decided, he argued, there is a need for an in-depth understanding of the economic and political vicissitudes and a good grasp of the society's expectations.  

"Exchange rate regulators must have a precise understanding and assessment of the actual and potential foreign exchange resources. They need to know which forex resources will yield and at what capacity, what resources can respond to different needs and in what areas can they be used. Furthermore, regulators also should have an accurate estimate of the volume of forex reserves of the CBI, the government, commercial banks and companies," the senior banking official was quoted as saying.

Past Experience

Kamyab ventured into the recent history of forex rate unification and said it was in 1993 when the unification plan was first implemented and the value of US dollar jumped to 1750 rials from 70 rials. "But this policy did not last long and the economy was back to the multiple rate regime within months."

From the late 1990's, reforming the foreign exchange and commercial policies began in earnest with the aim of easing trade, deregulating international commercial relations and unifying forex rates," he recalled.

 Kamyab added that after the necessary infrastructure was in place, the single rate plan was recreated for the second time in 2001 and the forex rate regime came to be known as the "managed floating" system.

Referring to the surge in hard currency rates in the free market in 2012, he pointed to the government's negligence toward fiscal discipline and the fact that the CBI's role as the top monetary and exchange rate policymaker had all but vanished. These downsides, plus the mounting burden of international sanctions, systemically pushed up currency prices to unprecedented levels in the free market, he contended.  

Regarding the relative tranquility and stability in the economy after the nuclear accord in January, he said, "The psychological impact of the nuclear accord created a sort of balance in people's expectations. On the other hand, the prevailing monetary discipline and the overhaul of rules means investments are less risky and the resources are moving toward the manufacturing sector."