The Iranian government recently sought to unify official and unofficial exchange rates for all economic and commercial transactions, after the rial plunged to 60,000 in the open market as part of a series of declines against hard currencies in the past months. This falls was caused by several factors, some of which are related to the implications of a potential U.S. withdrawal from the nuclear deal, inefficiency of the exchange system, outbound flows of foreign currencies as well as speculation on hard currencies.
No doubt, this move may achieve tentative success in addressing anomalies in the foreign exchange market, but will not keep the rial from plunging once again against hard currencies in the coming period, especially because of a rise in pressure on Iran over its interference in various regional crises and disagreement with world powers over its missile and nuclear programs.
Multiple Reasons
The foreign exchange market has come under pressure in recent months widening the gap in the price of the rial by 30 percent between the official and unofficial markets in mid-February. Other factors contributed towards this plunge. The first factor is the exchange market system itself, adopted by the central bank, and through which imposes varying exchange rates for economic and commercial transactions.
Until recently, the central bank continued to impose a lower-than-market rate for importers of some essential goods, while allowing the parallel market to set the price for economic transactions such as overseas travel of citizens. This allowed traders of foreign exchange to speculate on the rial. The second is a huge flow of foreign currencies from Iran to Britain, Canada and Turkey in the past three months, during large demonstrations in several cities in late December.
According to the Mohammad Reza Pourebrahimi, the chairman of parliament's economic commission, US$30 billion left the country in the past recent month, before the end of the fiscal year on March 20. The third factor involves the possibility that foreign currency traders played a pivotal role over the past month through speculating on the Iranian currency against hard currencies, where they benefited from economic uncertainty caused by concerns over a potential U.S. withdrawal from the nuclear deal. This prompted the governor of the central bank Valiollah Seif to warn investors speculating on the falling rial against potential losses.
The fourth factor is the weak economic returns of the nuclear deal, especially because Iranian banks continue to be unable to conduct transactions in the U.S. dollar because of U.S. sanctions. Additionally, many global banks are hesitant about doing business with Iran for fear of U.S. sanctions. Additionally, U.S. escalation against Iran through imposing more economic sanctions over its ballistic missile program has undermined international confidence in the economy in the past months. This prompted many foreign companies to refrain from conducting investment deals with Iran.
Running in parallel with this was a decline in Iran’s crude and condensate exports in the past month reaching as low as 1.94 million barrels per day in March, down 21 percent from the previous month and 26 per cent on an annual basis, a two-year low since March 2016. One of the reasons is that buyers of Iranian crude sought to buy from other suppliers. What stands out in this context is that several views indicate to some role played by Iran’s conservatives to manipulate the value of the currency to weaken the popularity of the moderate movement led by President Hassan Rouhani.
Various Mechanisms
Turbulence in the foreign exchange market imposed new pressure on the economy and the living conditions. Business run by some companies, especially those of small-size, was impacted amid resulting uncertainty and doubts about sufficient supplies on the market. The inflation rate is likely to continue to rise in the coming period above the level of 9.6 per cent of March.
In an attempt to reduce these negative consequences, the government, on April 10, rushed to announce unification of the official and open market exchange rates with the price of the dollar set at 42,000 rials in all markets and all businesses, the British pound at 59,330 rials and the Euro at 51,709.
After an emergency cabinet meeting, Iran’s First Vice President Eshaq Jahangiri was quoted by state media as saying that from Tuesday the price of the dollar would be 42,000 rials in both markets, and for all business activities. At the same time, the central bank clamped a $12,300 ceiling on the amount of foreign currency that citizens can hold outside banks. It called upon citizens to sell or deposit any surplus amounts in banks before the end of this month to avoid punishment.
First Vice President Eshaq Jahangiri reaffirmed the government's determination to combat the black market and noted that trading hard currencies outside the central bank would be considered smuggling.
The approach builds on a campaign by the police and the central bank in the past months to crack down on investors and exchange houses speculating on hard currencies. In February, the police arrested 100 foreign currency traders after the rial plunged against these currencies. Before the the central bank adopted the unification of official and open market exchange rates, it allowed Iranian banks in February to sell saving certificates with 20 per cent in annual interest for the local currency and 4 per cent for foreign currencies to help attract liquid money from the market and curb speculation on hard currencies.
It also cooperated with the government to adopt several measures to control the market and help preserve stability of the foreign exchange market. Most importantly, it struck deals in binary currencies with Iran’s major trading partners such as Turkey. Additionally, the government, in 2016, planned to conduct foreign transactions, and especially oil sales, in other currencies such as Euro, but failed to do so because the U.S. dollar dominates global oil markets.
The policy of unifying exchange rates represents an essential move towards reforming the exchange market, where it is expected to temporarily curb pressures on the rial from hard currencies, and especially relatively reduce the attractiveness of the parallel market using wide police campaigns on speculators.
However, it is also expected that this policy will incur significant cost that citizens will bear, as prices of basic commodities that were subsidised by the central bank will increase. According to estimates by the International Monetary Fund, carrying out this policy may push the inflation rate to above 12 per cent, two points above the current level of 10 per cent.
The exchange rate set by the central bank will remain unfair as it does not reflect the real value. That is, the current price of the dollar is set at 42,000, compared with 60,000 in the parallel market before the unification of exchange rates. This is considered a wide gap that may cause a recovery of the parallel market once again, especially if the central bank does not officially and gradually devalue the currency in the coming period.
In conclusion, it can possibly be argued that despite the importance of measures taken by the government and the central bank, especially regarding the unification of exchange rates, for treating market anomalies, their effectiveness remains relatively limited. This is especially so because of escalating foreign pressure on Iran over the its interventionist regional foreign policy and also because of the increasing possibility of scrapping the nuclear deal.
