Forex Rate Unification in Iran Put Off by Bullish Dollar

EghtesadOnline: With too many irons in the fire, the government and the Central Bank of Iran do not seem to be in the mood for making tough decisions, especially in the foreign exchange market.

News ID: ۷۴۴۶۰۷

31 December 2017

With the US dollar in the midst of a rally–not unusual in December when the travel season heats up–and budgetary debates raging in the parliament, reform topics like the unification of dual exchange rates and floating the rial have been postponed indefinitely.

On Thursday, the USD dollar exchange rate began another rally and reached 42,050, defying expectations by CBI Governor Valiollah Seif who predicted two weeks ago that the rate would "moderate".  As the markets reopened on Saturday, the rial was quoted at 42,200 to the dollar in Tehran market, which marks a record for the benchmark currency.

While the CBI had scrambled to cool the market by pumping hard currency into it at the time of the previous year's bull run, this year it has acted more nonchalantly–either because it has become more receptive of a "real" rate for the rial or out of sheer necessity as its coffers have taken a hit, Financial Tribune reported.

In the 2018-19 budget bill, the government has set the official exchange rate at 35,000 rials–a rate lower than the official CBI rate and rejected by analysts as an "unreal" one. The government responded to criticism by saying that the rate has only "computational" value and is in no way reflective of the government's forex market visions for the next Iranian year (starting March 21).  The budget itself is contractionary due to the government's shrinking revenues.

"The current hike in exchange rate is natural, considering the rate of inflation. The Central Bank of Iran is expected to manage the exchange rate in the same vicinity till the yearend," Pouya Jabal-Ameli, a CBI economist and currency analyst, told Financial Tribune.

Jabal-Ameli noted that any unification plans would have to be postponed at least until next year.

Failure to adopt a single foreign exchange rate system would be a blow to Seif whose five-year term will expire next year and who had promised to float the rial in a "controlled" way on multiple occasions through his tenure.

A 10-month survey by IBENA, a news website, of the greenback's foreign exchange rate in the open market and the official one shows that the gap between the two rates has grown wider, despite the central bank increasing the official rate by 3,444 rials up until Dec. 21.

This increase has been offset by the rally in the parallel market, leaving the current gap between the two rates at around 6,000 rials.

The persistence of dual exchange rates–albeit with a more limited force than in the past–is a disappointment to economists and private sector figures who have repeatedly called on the administration to phase out the allocation of subsidized hard currency to certain imports–something they say fosters rent-seeking behavior and weakens domestic exports.

In the gold coin market, prices were up, with the benchmark Bahar Azadi coin gaining roughly 1% and fetching 14.28 million rials ($338) on Saturday. The gold coin rally also comes in spite of CBI's botched efforts to contain it.

Shaping Anticipations

However, the results of a study by the Institute for Trade Studies and Research–affiliated with the Ministry of Industries, Mining and Trade– show that market expectations for the currency market for 2017-18 have been aligned with realities and above the CBI's target.

The survey of key players that include business figures, academics, lawmakers and policymakers had put the dollar's exchange rate at 40,000-44,000.

According to ITSR, the markets braced for potential volatility in the wake of Donald Trump's surprise victory in the 2016 US presidential elections.  This, they reckoned, could potentially endanger the 2015 Iran nuclear deal and restore sanctions that had greatly damaged the Iranian economy in the past decade.

The report cautions that these same expectations could prompt more rallies and further fuel instability in the forex market. Hence, the think tank urges CBI to monitor market expectations vigilantly and manage them.

Enlightening the public and instilling transparency are considered the main solution to prepare for any future storm.