The Central Bank of Iran has dismissed claims that the government is justifying the budget by manipulating the foreign exchange rates, according to an announcement published on the CBI website last Wednesday.
"The rate set for the dollar in next year's budget is only 7.5 higher than its current official rate" says the announcement, "which only compensates a part of the inflationary gap."
Even if the government has done so, the measure would be consistent with Article 81 of the Fifth Five Year Economic Development Plan, which requires that the imbalance in the currency rate be reduced by the government, the CBI has said.
In announcing the daily rates of foreign currencies, the CBI considers the requirements of the economy and the foreign exchange market, as well as the set rate for the dollar in the budget, the central bank added.
So, “the bank cannot be blamed for intervening in the market to balance the budget and impose inflationary costs on the society,” concluded the announcement.
In Governor’s Defense
Defending the statements made by the governor in recent weeks, the CBI announcement stated that it is the legal responsibility of the governor to bring to light news about exchange rate fluctuations.
The announcement goes on to say that the central bank is sensitive towards fluctuations in currency rates, and that this sensitivity currently has increased due to the ongoing external factors currently afflicting the economy.
As a main policy making body, the CBI is responsible to inform the public about trends of foreign exchange rate fluctuations, and to control the effects of temporary variables by mitigating impacts on the exchange market.
“Regarding the bank’s legal responsibility in terms of changes in the foreign exchange market, the recent interview of the governor about the status of the currency market has been natural and necessary,” says the announcement.
Global Appreciation of the Dollar
The CBI’s announcement attributes the growth in the rate of the dollar to be partly due to the global strengthening of the currency against other currencies.
The rate of the dollar in the free market has increased by 13 percent in the nine-month period since the beginning of the current Iranian year (March 21, 2014) says the announcement. While the euro has increased only by 1.3 percent in the same period, it adds.
Nevertheless, the main concern of the CBI is to limit the impact of exchange rate fluctuations, it says, adding that “reducing the exchange rate fluctuations is one of the main achievements of the government, which has been underlined by the governor in his interview.”
Currently, as a result of being affected by US sanctions and decreased oil prices, exchange rate fluctuations are affected by temporary situations rather than following long-term trends, “which has given rise to significant instabilities in the currency market, leading to a ‘herd-effect’ and speculative behavior” says the announcement.
The central bank, as the responsible body for preserving the value of the national currency and the foreign exchange policy maker is determined to reduce the tensions in the exchange market and keep the fluctuations in an acceptable range, it adds.
No Foreign Currency Injection
The central bank rejected the possibility of any artificial intervention in the exchange market in a bid to control the exchange rates, especially by injecting foreign currencies to the market, characterizing the approach to be a destructive method which was experienced in 2000s.
At the time, long-term advantages like developing production and increasing the GDP growth were sacrificed in favor of short term advantages of decreasing the inflation rate.
Not only was injecting foreign currencies into the market void of any long-lasting positive effects on the economy, it yielded negative results as it eliminated production advantages, reduced competitiveness, and increased the amount of non-productive activities, it says, adding that “the prices of all goods and services are increasing, and the currency rates are no exception.”
