Inflation-Forex Interface to Help Boost Exports

Inflation-Forex Interface to Help Boost ExportsInflation-Forex Interface to Help Boost Exports

A senior official has called on the Central Bank of Iran to adjust the foreign exchange rates monthly in proportion with the difference between foreign and domestic inflation rates to boost Iranian production and exports.

“Implementing this scheme will also prevent any sudden fluctuations in the foreign exchange market like we witnessed in 2012 and 2013, but still the government and CBI have not paid any significant attention to this policy in recent years,” Mohammad Lahouti, the head of Iran Export Confederation, was also quoted as saying by IBENA.   

A number of economic experts believe that CBI measures for controlling currency market fluctuations and reducing the rates have hurt exporters and domestic production units.

Lahouti noted that keeping the rates down by injecting foreign exchange in the market and preventing the rates from increasing in tandem with inflation rate practically reduces the country’s exports.

“This is while the allocation of cheap, subsidized foreign exchange by the government to imports and the huge amount of smuggled goods into the country worsen the situation significantly,” he said.

“The result of the aforementioned factors is that the price of imported commodities is lower than that of domestic products and the reason is clear: The inflation rate affects domestic production while imported goods do not face this problem.”

The official explained that the inflation rate in the world’s stable markets is less than 5% and forex rates are usually fixed.

“While they do not experience much fluctuation, that is exactly how they absorb foreign investments,” he said.

Lahouti further said the Iranian government managed to reach a single-digit inflation rates after 26 years but “we have to accept the fact that keeping down the inflation rate considerably harms domestic markets, which led to a recession that countered the effects of single-digit inflation rates”.

The Iranian government helps domestic producers by slapping high tariffs on imports and the fact that the country is not a member of World Trade Organization also considerably works in their favor. But in reality, import-export policies (especially when it concerns forex measures) were not only uneconomical, but were also detrimental to domestic production.

According to a report by the Institute for Trade Studies and Research (affiliated with the Ministry of Industries, Mining and Trade), import tariffs levied in the last Iranian year (ended March 20, 2017), amounted to 115.5 trillion rials ($3.1 billion) that accounted for 14.6% of the government’s total tax income, 10.3% of the country’s total income and 5.5% of the government’s budget. The ratio of import tariff income to total value of imports stood at 7.4%.

During the period, the value of smuggled commodities to Iran hit $15 billion, which is equivalent to 22% of all imports (both legal and smuggled) to the country and reduces that ratio from 7.4% to 5.7%.

Back then, the gap between the official and free market forex rates was about 4,921 rials ($0.13). If only half the total imports benefited from the official rate, the amount of currency subsidy spent  during the 12-month period  would have reached  129 trillion rials ($3.44 billion)–12% more than all the import revenues in that year.

The head of Iran Export Confederation added that after the implementation of the Joint Comprehensive Plan of Action (the formal name of Iran’s nuclear deal with world powers), CBI promised to unify the dual exchange rates by the end of the last Iranian year since the bank was able to access its frozen foreign assets but the fact that the rate unification did not happen indicates that the amount of freed assets has not been sufficient to cover this action.

“If the country benefits from a unified forex rate, which is based on economic realities, and CBI increases the rate each month based on the difference between foreign and domestic inflation rates, it will definitely help domestic production and exports while decreasing the amount of illegal imports,” he said.

Lahouti noted that if banks add forex fluctuations to their financial statements, it could have positive or negative effects on their balance sheet, but eventually the result will be positive since it will improve their transparency and reduce the risk of investment in Iran.  




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