The Central bank of Iran continues its trend to devalue the rial's official exchange rate while it seeks to strengthen its market rate. CBI's target is to return the country's exchange rate regime to a unified single currency rate system, with a managed float.
Currently Iran has a multiple exchange rate system, with currency prices depending on where you are buying. The dollar from the CBI is traded around 26,600 rials and the free market rate is over 31,700 rials, which shows a 19 percent difference.
The CBI's target is to reach a two percent difference between market and official foreign exchange rates. This would be a return to market conditions back in 2002, says a CBI official, when the bank was able to trade the dollar for 7,900 rials, and official and market rates were close.
Yet, as uncertainty has increased over the fate of Iran's nuclear negotiations, the central bank has become more concerned with keeping the lid on volatility, which has hurt the industry. Some officials are saying that unifying the currency is a job for next year.
Official Exchange Rates Climb
On the official front, the rial is weakening. The Iranian rial's official exchange rates are being devalued by the central bank, in small increments on a daily basis and although the price changes are barely noticeable at first glance, they are adding up fast. The official rate for the dollar has gone up nearly one percent, in just 20 days.
While the official currency rates have limited use beyond importing essential goods like food and medicine, changes in the rates do show CBI's attitude towards market rates, also, all government financing and reporting is done via said rates.
"It can signal the bank's intention to meddle in the market and direction of their moves" said a currency trader in Tehran to Financial Tribune.
Restraining Market Rates
On the market front, CBI's single exchange rate target is having varied effects. The rial is strengthening, yet with some volatility which is inherent in currency markets.
Though not officially confirmed, the bank seems to be making moves in Tehran's currency market, by making more foreign currencies available to major bureaux de change in the city and controlling volatility, a source who did not want to be identified, told Financial Tribune.
The silent strategy is taking effect. The rial's value has increased by 5.6 percent, against a basket of currencies, during the past 12 month, according to Abolfzl Akrami, the economic deputy for the central bank.
The US dollar's market exchange rate against the rial is falling by the day. It has come down from June's highs of 33,500 rials to below 31,000 rials at the end of August, showing a 7.4 percent decrease in the dollar's value against Iran's currency.
The financing for the alleged market moves seem to come from the funds recently released to the Iranian government, $1 billion of which was repatriated on Friday from Japan via Oman.
Iran is under severe sanctions by the United States, European Union and the United Nations for complications over its nuclear energy activities. While Iran maintains its activities are strictly peaceful, the US claims otherwise.
Over $100 billion of Iran's oil revenues were frozen overseas, $7 billion of which have so far been returned, as part of a deal made between Iran and the P5+1 – the five permanent members of the UN Security Council plus Germany – which was signed in Nov. 2013.
Based on the deal Iran halted some aspects of its nuclear energy program in exchange for a limited easing of international sanctions including the partial release of its frozen funds.
Some investors say the funds are not being used by the central bank to lower the price of the dollar and that the mere availability of the $7 billion to the bank is creating a psychological effect, calming markets and driving down investor demand.
"It's all psychological" said another bureau de change owner to Financial Tribune, "people think there's a deal in sight."
Reducing Fluctuations
Reducing currency volatility is one of the primary concerns of any central bank, a task the CBI has been struggling with, in recent years. "Supply and demand will determine currency prices but we want stability in the market," CBI Governor Valiollah Seif has recently said.
The CBI lost control over the currency in Dec. 2011, the rial lost 70 percent of its value in the ensuing two years.
The currency market was in turmoil and the central bank lost its power and credibility in the battle to stabilize the currency, as sanctions depleted its resources.
There were also rumours circulating the market that the bank was making money off the fluctuations in the currency.
The last nail in the bank's coffin was mounting international pressure on Iran's nuclear activities, which led to sanctions targeting the bank, directly.
The central bank was kicked out of the electronic banking system, known as the SWIFT network, for allegedly aiding Iran's nuclear energy program. The network manages most international financial transactions from its offices in Belgium.
Regaining control over the rial was put on the bank's agenda early last year, with the coming of a new administration, led by President Hassan Rouhani. Sentiments turned positive, as investors saw the return of some sanity to policy making.
The positive sentiment has aided the CBI gain its footing. Despite a lack of foreign reserves, the bank has been quite successful in stabilizing the markets. "[Currency] volatility has dropped by 70 percent," the CBI governor announced recently.
Challenges
Dollar's declining trend against the rial has reversed in the past week, as news of fresh US sanctions against 25 Iranian and foreign firms, hit markets on Aug. 29, adding to growing fears that the worst wasn't over. The dollar advanced by one percent in a day.
Now the greenback is hovering around 31,700 rials, as mixed economic news out of the US, anticipation of policy changes by the Federal Reserve, Saturday's European Central Bank signal to provide $906 billion of fresh stimulus, and uncertainty over Iran's ongoing nuclear talks, are taking it on a seesaw ride.
The current fluctuations in the currency market, bring to light two challenges the CBI faces, on one hand, the greenback is at a 14-month high, which pushes the market rate for the dollar away from the CBI's target. On the other, the fluctuations are a sign of the CBI's fragile power.
Seif has accused the media of creating turmoil that led to the past week's market volatility, a speech which brought back memories of the days when the CBI closed down the markets because it was unable to stabilize them in 2012.
Abolfzl Akrami, economic deputy for the central bank, says that the CBI needs a "proper portfolio" of foreign exchange reserves to unify the foreign exchange rate regime. That means the CBI requires more of its blocked foreign exchange reserves to deliver a stable currency market to the president.
In order to get its act together, the central bank needs some added punching power. The bank needs its funds, and the markets want political and economic stability. This was recently expressed by Seif and his deputy governor, Akbar Komijani, who cited the normalization of international relations, as a prerequisite to unifying the foreign exchange rate system.
Iran's negotiations are to resume in mid September, with the future of the foreign exchange market hanging in the balance.
