Economy, Domestic Economy

Increasing Rial/Dollar Nominal Exchange Rate

Increasing Rial/Dollar Nominal Exchange RateIncreasing Rial/Dollar Nominal Exchange Rate

The rial/dollar exchange rate needs to increase, says a new research by the Institute for Management and Planning Studies, a well-known Tehran-based think-tank affiliated to the Presidential Office headed by Masoud Nili, senior economic advisor to the president.

The research calls for the move to boost exports, arguing that to attain economic growth stimulation of domestic demand will not suffice due to the continuing fall in government’s revenues and households’ income in recent years.

During 2001-11, the nominal exchange rates were constantly manipulated to stand below the real exchange rates. The gap between the two rates narrowed in 2011 and 2012, but the two diverged markedly in the closing months of 2014 and early 2015. The value of nominal exchange rate stood at less than 60% of the real exchange rate then, an article in the Persian daily Sharq said.

Nominal exchange rates in Iran are not proportional to the inflation rates despite the former’s rise last year (started March 21, 2014). One economic ramification of this is the decline in domestic products’ competitiveness. In other words, domestic products would see a price rise compared to foreign commodities and lose their competitiveness.

In today’s economic climate, the institute’s research warns against walking the same line i.e. keeping the nominal currency exchange rates low. However, the Central Bank of Iran has recently been playing the rial depreciation card to boost exports and help the economy grow. The move has drawn various reactions from country’s economic players.

An incremental rise of exchange rates would boost exports in the second half of the current Iranian year (started March 21), says deputy minister of industries, mining and trade, Mojtaba Khosrotaj.

“It would be reassuring for exporters to see that the government is in control of the exchange rates and that a gradual, tractable growth, without wide fluctuations is in place,” Mehr News Agency quoted the official as saying.

Khosrotaj said that in the past, imports used to outweigh exports and changes in the exchange rates and decline in the value of national currency heavily influence imports and exports.

“Now the economy is moving toward giving a bigger share to exports which takes the edge off the worrisome problem of growing exchange rates,” he added.

According to Khosrotaj, the effect of exchange rates is insignificant when it comes to agricultural products since the government provides farmers with subsidized fertilizers and pesticides, but rising rates might drive up the costs of raw materials and machinery in some industrial units.

“By and large, the impact of a rise in exchange rates is minimal on various goods such as carpets and it may even boost exports of knowledge-based products and technical and engineering services. After all, knowledge creates wealth,” he said.

“Of course, I don’t believe increasing the dollar/rial exchange rate is the only way to boost exports, but it can help a lot in the short run.”

According to the latest figures released by the Islamic Republic of Iran Customs Administration, Iran’s non-oil trade in the first half of the current Iranian year (started March 21) stood at $41.346 billion with exports and imports at $20.494 billion and $20.852 billion respectively. A $50-billion trade volume was registered for the same period of last year. In terms of value, exports and imports experienced a decrease of more than 14% and 20.5% respectively.

Hossein Raghfar, economist and university professor, thinks differently. “Weakening the rial would only create motivation for a handful of exporters: those who export mineral ores, saffron, carpet and agricultural products and not the goods needed by regional markets.

He noted that the petrochemical industry also centers on exports of products, which are considered raw materials at the end of the day.

“As we speak, we are losing the domestic market due to the low quality of local products while increasingly becoming dependent on imports. The neighboring markets are in need of goods which are not produced in Iran,” he said.

“One of the main challenges in Iran’s economy is that our products suffer from outdated technology and do not enjoy high quality which is to blame on high cost of production and lack of bank facilities. In fact, 70 million people will feel the financial pinch if the value of dollar goes up. The move will only serve the interests of special groups.”

Masoud Daneshmand, head of Iran-UAE Chamber of Commerce, believes that increasing the nominal exchange rates may boost exports for a short period, but it would also make imports costlier and add fuel to the flames of inflation.

“I believe the best we can do is to spur domestic demand. The prevailing recession in the country has affected small- and medium-sized enterprises, employment, GDP and economic growth,” he added.

Deputy head of Iran Chamber of Commerce, Industries, Mines and Agriculture, Pedram Soltani, who appears to be one of the supporters of the idea, says: “To pave the way for economic growth and gain a bigger share of production and industrial services, we need to go down this path. But it won’t help solve all the economic problems. The move will have negative consequences such as market instability, if not done gradually.”  

Saeed Laylaz, who is a journalist and a university professor, said governments should allow exchange rates to rise if they fail to keep inflation in check.

“Having a weaker local currency is inescapable in today’s economic climate, amid tumbling oil prices. If we insist on following the same policy, we’ll have to bear witness to a situation similar to that of 2011 when the rial lost two-thirds of its value against the dollar. The best the government can do is to regulate the rates and make them predictable,” he said.