In an Interview with EghtesadOnline:

Eliminating the Nima Exchange Rate: The End of Corruption and Rent-Seeking / The Commercial Currency Exchange System: A Key Step Toward a Unified Currency Market

The Secretary of the Iranian Iron Ore Association stated that the removal of the Nima exchange rate will not lead to an increase in currency rates. Instead, this structure will gradually move toward a single currency and will help prevent rent-seeking and corruption.

News ID: ۲۰۰۰۴۸۹

18 December 2024

EghtesadOnline: The elimination of the Nima system and the establishment of a Center for Negotiated Currency Exchange will bring about a significant transformation in the country's currency and foreign trade sectors. The Nima system, which had been used for years as the primary tool to control the currency market, faced multiple issues such as penalizing exporters, creating rent-seeking opportunities for importers, and insufficiently delivering currency subsidies to the final consumer. These problems had posed serious challenges to exporters of mineral products. However, with the removal of this system and its replacement by a commercial currency exchange system, mineral sector players can now benefit from a competitive and transparent market. This change will also encourage more exports, attract foreign investments, and foster the development of downstream industries in the mining sector.

In this regard, Saeed Asgarzadeh, Secretary of the Iranian Iron Ore Association, told Eghtesad Online: "The reality is that what happens in Iran regarding the repatriation of export revenues is practically unprecedented worldwide. In no other country is an exporter obliged to return the proceeds of exports at a lower price."

He added: "Since the revenue from exports belongs to the exporter, the obligation to return the currency is a sign of weak governance in managing the currency market. Imagine if another condition were added, requiring exporters to return their currency at a specific rate and formula. Naturally, this will have an impact on businesses, especially on those producers with lower resilience. This rule has always fluctuated, sometimes being very restrictive and at other times being eased. Now, it seems the situation is moderate, but the issue has not been fully resolved."

Asgarzadeh continued: "When the difference between the Nima rate and the free-market rate was only two thousand tomans, almost all exporters offered their currency to the Nima system, as it was naturally safe and transparent, with all transactions documented. However, when we define both a free market and a Nima market, with a large price difference between the two and allowing some people to sell their currency in the free market while others do so through the Nima system, naturally problems arise. This price difference, like a 20,000-toman gap in a free market rate of 50,000 tomans (a 40% discrepancy), can lead to multiple issues."

The Secretary of the Iranian Iron Ore Association then pointed out the negative consequences of having two separate currency markets: "This approach not only fails to help organize the country's exports, but it also divides exporters into two groups—honest and dishonest. Exporters who follow the legal methods will definitely be harmed, as those who act illegally will have more freedom and be 40% ahead of their competitors. This has led to a decline in the repatriation of export earnings, rather than an increase. Additionally, domestic goods prices experience severe volatility, and some individuals with higher purchasing power use disposable cards to export goods and sell the proceeds in the free market instead of bringing them back to the country. A small and simple decision can cause major economic problems."

He further stated: "Last year, after extensive analysis and consultations, we were able to persuade the government that applying uniform pressures on all goods, especially mineral products with low resilience, could create opportunities for corruption and cause numerous problems."

Asgarzadeh continued: "The exchange rate difference between Nima and the free market can become a problem for the entire economy because it pushes the country toward import-dependency. This policy encourages importers while effectively penalizing exporters who are forced to sell their currency at lower rates to importers. Additionally, there is no effective mechanism to control the price of imported goods in the free market, and importers can sell these goods to consumers at whatever price they choose."

Asgarzadeh said: "For traders, it doesn't matter whether they are exporters or importers, but the current policies encourage them to focus on imports."

This mining industry expert explained: "In 2023, after much effort to convince members of the working group of Article 2 of the Cabinet’s approved regulation, it was finally agreed that mineral products would be exempt from the restrictions of this regulation. Even in the original version of the regulation, steel products were mentioned, so upstream production chain goods were moved from section one of Article 8 to section two, making the conditions for these products more normal and natural."

According to Asgarzadeh, two significant mistakes occurred in 2024, the roots of which go back to months earlier in 2023. He explicitly blamed the Ministry of Industry, Mine, and Trade (MIMT) and the Central Bank of Iran for these mistakes. These two institutions misinterpreted the term "steel products" and extended it to the entire steel production chain from start to finish, ultimately causing confusion and numerous issues. Asgarzadeh emphasized that the Ministry of Industry, as the main body responsible for the steel industry, should have a clear understanding of industry terminology, where raw materials extraction and sponge iron production are considered mineral products, while from the billet stage onward, the products are categorized as steel. Thus, even if steel products had been pursued according to the Cabinet’s decision, this misinterpretation of "steel products" would not have occurred, and no issues would have arisen.

He emphasized: "In any case, there was significant resistance within the Central Bank, and strange approaches were taken early in 2024. However, it seems that rather than investigating the various political players, it would be better to put on trial those who have caused disruptions in the country's economy with their wrong decisions."

This mining expert added: "We have always believed that establishing a currency exchange center could help control currency prices. For this reason, in 2023 and 2024, we proposed creating a trading platform for currency exchange at the Commodity Exchange to manage currency prices. Unfortunately, this idea was met with opposition, but if an economist had examined the proposal, they would have certainly recognized its effectiveness in controlling currency prices. Thankfully, the situation is improving, and it seems we are moving toward stability, with all economic players directed toward a single exchange center."

The Secretary of the Iranian Iron Ore Association also discussed the positive impact of removing the Nima exchange rate: "In any case, if you stabilize the currency price in conditions where you anticipate it may rise, it doesn’t mean the exchange rate hasn’t changed, because the free-market rate follows its own course. I don’t believe that the establishment of a commercial currency exchange system will lead to an increase in currency rates. Instead, this structure will gradually move toward a single currency."

He explained: "For goods that we wish to subsidize, we should not use policies like the 4,200-toman or 28,500-toman exchange rates. Instead, the currency should have a clear and unified price. Rather than using these rates, we should directly subsidize producers or importers. For example, if you import a good, we would buy it at a price lower than the free market rate and pay the difference as a subsidy. This is a clear model that prevents corruption."

He added: "War-torn countries typically don’t have multiple exchange rates and usually rely on a single exchange rate. Having several exchange rates not only fails to control the market but also creates opportunities for corruption and rent-seeking."

Asgarzadeh concluded: "Regarding the currency market, it makes sense to have a clear and organized system. Our proposal was to create a currency exchange market under the Commodity Exchange. The Central Bank decided to undertake this task alone, but our suggestion was for the government’s involvement to be minimized, with the Central Bank serving as a regulator in this market. For example, if the Central Bank wants to prevent the dollar from exceeding 65,000 tomans, it could intervene when the market approaches 66,000 tomans, selling at 65,000 tomans to control prices. This method eliminates the need for excessive money injections into exchange offices, although some of the current methods have their own supporters. Ultimately, some of these currency interventions may end up benefiting purposes we are unaware of."

He concluded: "If someone fails to understand the country's current conditions and threats and insists on solving problems using old methods, I believe they are doing a disservice to the country and its territorial integrity."

Asgarzadeh ended by saying: "Currently, the currency exchange market shouldn’t be seen as ideal. However, it can be considered a positive step toward improving the currency situation. Ideally, this market should be detached from the Central Bank, which should have less involvement in setting exchange rates. Excessive intervention by the Central Bank in the currency market leads to rent-seeking and other problems, so it would be better for this market to be transferred to the Commodity Exchange, where the Central Bank can act as a regulator."