Iran Parliament Mulls Forex Rescue Package

EghtesadOnline: With the US dollar's exchange rate remaining above the psychological threshold of 50,000 rials in Tehran's market, lawmakers frustrated with the performance of the Central Bank of Iran in managing the volatility are considering a roadmap of their own to restore calm to the market.

News ID: ۷۴۵۱۲۴

08 April 2018

According to Chairman of Majlis Economic Commission Mohammad Reza Pour-Ebrahimi, the body is to meet next week with CBI officials to find a way out of the current predicament where forex rates are bullish without an apparently logical reason.

"A joint meeting of the [economic] commission with central bank officials is due next week and if we reach a decision to make our plans operational, things will continue as they are but if we do not reach an agreement, we will introduce our double-urgency motion to stabilize the forex market [in the parliament] next week," Pour-Ebrahimi was also quoted as saying by Mehr News Agency on Saturday.

The criticism of CBI's performance grew louder after the sudden jump in forex rates in the early days of the current Iranian year (started March 21). The new volatility lent a further blow to the administration of President Hassan Rouhani who had promised the nation during the final months of the year that they could rest assured that the national currency would not depreciate further, according to Financial Tribune.

Back then, and in order to shore up the rial, the CBI authorized banks for a period of two weeks to offer interest rates of up to 20% on fixed one-year deposits, against 15% previously.

The bank also ordered lenders to issue rial-based foreign exchange bonds with yields of up to 4.5% and gold sales at attractive prices.

The move was at the time panned by some as a turnabout of CBI's loose monetary policy, which registered a single-digit inflation rate after a quarter of a century.

Pour-Ebrahimi renewed his censure of CBI, claiming that the temporary rate increase in mid-February had cost the lenders 150 trillion rials ($2.97 billion).

"CBI should have managed the foreign exchange market through forex tools and not monetary policy," he said, adding that the increase in deposit rates would also trigger an increase in lending rates.

Rejecting the argument by CBI Governor Valiollah Seif that the monetary tightening only lasted 15 days, he said one effect of the decision was the issuance of treasury bills by the government at 20% yields in the following days.

Majlis Motion

Pour-Ebrahimi elaborated on his commission's plan for the forex market, saying that at its core, it seeks to revive foreign currency deposits in banks.

Recalling a time in the former administration when banks accepted foreign currency deposits but returned those deposits in rial to their owners, the lawmaker said that trust should be restored to banks where people could entrust their foreign exchange again.

"Our estimation is that in the past few years, $30 billion flowed out of the country and were transferred to foreign bank accounts," he said.

He also reiterated his claim that $20 billion worth of foreign exchange are currently being held outside the banking system and at home, which he said was damaging the economy.

Pour-Ebrahimi also attacked the dual exchange rate system used in the country and said this was fostering corruption and rent-seeking.

He also called for organizing exchange shops by instilling more transparency into their affairs as another pillar of the parliament's forex strategy.

As the Iranian currency is prone to fluctuations, investors would be wary of parking their foreign currency in banks, fearing they would lose their money. Another reason concerns the country's multiple exchange rate system wherein banks convert hard currencies at lower rates.

CBI has recently required banks to reimburse their depositors in the same currency that they made their deposits in and thereby "trust banks and avoid the risk of keeping cash at home and at the same time benefit from proper and desirable returns on deposits".

Pour-Ebrahmi said that as part of his commission's proposal, two banks would be named for undertaking currency deposits, with the CBI guaranteeing the safety and return on deposits.