CBI Moving to Rate Unification Conditions

The Money and Capital Markets Commission of Iran Chamber of Commerce, Industries, Mines and Agriculture held a meeting on Saturday to weigh in on the requirements of the long-overdue plan to unify foreign exchange rates and the country's progress in achieving this goal.

The Central Bank of Iran's deputy governor for foreign exchange affairs was the special attendee who said the Iranian government considers foreign exchange rate unification necessary and intends to implement it as early as 2013.

"Rate unification is only useful when it is stable and consistent, but if it is done half-heartedly, we won't be able to put it right for years," Gholamali Kamyab was also quoted as saying by ICCIMA's official news website.

Kamyab noted that the volume of forex arrears is a crucial prerequisite for adopting a single exchange rate regime, which is at a low level at present since Iran was unable to absorb any significant foreign loans in recent years.

"Our external debts are lower than international standards and the amount of short-term accounts is not at a high point either," he added.

Kamyab referred to CBI's measures taken so far to help achieve rate unification such as shortening the list of imports eligible to receive foreign currency at official rates as well as making changes in foreign exchange regulations, which will be announced after the rate unification is implemented.

If You Fail

The CBI official pointed to the first attempt at rate unification in 1993 when the country's foreign debts exceeded $30-40 billion and national reserves were at an all-time low.

The economy back then totally depended on oil income, which led to the scheme's failure and problems for businesses.

 "However, rate unification was implemented precisely and completely in the second attempt in 2002 but unfortunately proved short-lived due to political events and unsound economic policies," he said.

Kamyab considered the growth in non-oil exports positive saying it would help the process of scrapping dual exchange rates. "Our economy should be export-oriented with exports taking center stage in all economic policies".

Kourosh Parvizian, the head of the commission and president of the Association of Private Banks and Credit institutions, also attended the meeting and elaborated on the positive aspects of forex rate unification as it would benefit both ordinary citizens and the production sector.

Iran had adopted single exchange rates twice in the past. The first experience dates back to 1993 when it did not last more than a few months due to economic turmoil and the exchange rate regime went back to multiple rates.

The second time though, following the experience gained from previous setbacks and reforms in forex and trade policies to deregulate foreign trade, foreign exchange rate unification was successfully implemented and a "managed floating system" was announced in 2002.

Unfortunately, it only lasted until 2010 when the next administration failed to observe financial and budgetary discipline.

Iran currently uses two exchange rates, the free market rate, which stood at 37,410 rials to the US dollar on Wednesday, and another official exchange rate for state transactions. CBI fixed the official rate at 32,500 rials on Wednesday.

In order to bring the rates together, the government began to gradually increase the official exchange rate for it to come closer to the unofficial market rate. CBI has succeeded in narrowing the gap between the official foreign exchange and free market rates as their difference stood at 18% in February but it currently hovers around 13%.

"We are not saying the nuclear deal has resolved every issue but foreign banks' unwillingness to open credit lines for us has nothing to do with that," Kamyab said, noting that banking relations are improving, though hurdles pertaining to the banks' internal problems remain.

"We have to admit that international standards have changed and we have fallen behind."   

While many officials, including Central Bank of Iran Governor Valiollah Seif had initially promised that forex rate unification would be realized by the end of the previous fiscal in March, that has not materialized due to what the officials call "unfulfilled conditions".

Since the removal of international banking restrictions in January 2016, Tehran has secured links with only a limited number of smaller banks as US sanctions remain in force and large foreign institutions still fear potential fines.

Banks remain nervous after US penalties, including a $9 billion (£7.32 billion) fine on France's BNP Paribas, were imposed in 2014, partly for violating nuclear-related financial sanctions against Iran.