Rial's Future

EghtesadOnline: Rial has depreciated more than 10% over the last three months against the US dollar and was quoted at 41,360 to the greenback at Tehran's foreign exchange market on Monday.

News ID: ۷۴۴۴۲۹

14 November 2017

The bullish trend of the American currency is also evident in the official rate, as the Central Bank of Iran also raised its exchange rate from below 33,000 to above 35,000. But the question is whether the trend will continue?

The latest official report indicates that in the first seven months of the current fiscal year(started March 21), Iranian imports hit $27.81 billion, indicating a 2.17% decline year-on-year, while  non-oil exports reached $24.71 billion, up by 15%  on the previous year. In other words, non-oil trade deficit is now more than $3 billion, whereas Iran had experienced a trade surplus last year.

The picture becomes complicated, considering that import figures do not include smuggled goods. Thus, the external sector illustrates a huge misalignment on the exchange rate, which pushes the market toward further depreciation in Iranian rial, according to Financial Tribune.

Signals indicate CBI officials are eager to restrict the misalignment on the exchange rate. Iran has suffered from high inflation for decades, but oil revenues enabled policymakers to stabilize the exchange market. Therefore, rial depreciated much less than the inflation rate. The process has caused real appreciation and weakened competitiveness of the non-oil sector.

However, the policymakers are aware of the fact that CBI cannot endure real appreciation any more. Hence, the need for the exchange rate to be persistently adjusted based on the difference between domestic and foreign inflation.

The positive analysis regarding trade data, along with the normative perspective, supports rial’s depreciation. But there is a limit to that policy: Since CBI can intervene in the market through oil revenues (on the rise these days), officials need to assure people that the adjustment will not have a shock effect.

Knowing that any adjustment in the exchange rate higher than the bank interest rates could prompt speculative behavior in the currency market, policymakers are eager to have a rate well below the interest rate, which currently hovers around 18%.