Forex Rate Unification Strengthens Iran Banks

EghtesadOnline: As Iran moves to unify its exchange rates, the government has announced new policies that give the banking system the prime role in the foreign exchange market.

News ID: ۷۴۵۱۵۷

15 April 2018

According to measures decided at the Cabinet meeting late Wednesday, all purchase orders (for imports ), including those at free trade zones and special economic zones, will have to be officially registered, the hard currency for which will be provided exclusively by banks or licensed currency exchangers.

According to the rules published on the official website of President Hassan Rouhani, remittances can only be processed through banks and certified exchange shops.

Elaborating on the measure, Central Bank of Iran's deputy for foreign exchange affairs said on Friday that all importers should get their hard currency from the banking system and if banks have any difficulty in this regard, the duty falls to certified exchangers, Financial Tribune reported.

Currency exchangers–some of which are affiliated with banks–have traditionally played an important role in transferring money for importers, especially during the long years of sanctions when Iranian banks were cut off from the global financial markets.

After the lifting of sanctions on January 2016 in the wake of the landmark nuclear deal between Iran and world powers, Iran began to gradually prompt the banking system to trade in the open forex market.

Officials cited lack of transparency and extra costs as reasons for sidelining the exchange shops. A possible catch would be Iran's limited progress on the banking front in the post-sanctions era due to US primary sanctions that ban Iran from the US financial system.

The government announced late Monday that it would enforce a single exchange rate to the dollar, banning all unregulated trading after the rial hit an all-time low.

In what was regarded as drastic measures, the government also set the official rate at 42,000 rials to the dollar as of Tuesday. First Vice President Es'haq Jahangiri said trading at any other price was forbidden and would be considered "smuggling".

The decision came after a two-day hike in prices of foreign currencies that saw the greenback trading at 62,000 rials.

CBI Governor Valiollah Seif later said the rate was not fixed and would swing in line with inflation and other market mechanisms.

Foreign Exchange Controls

The Cabinet also ruled that all exporters are required to bring back their export earnings to the country's "economic cycle" through procedures set by the central bank.

Exporters are required to sell their hard currency to the banking system or deposit it in domestic banks.

It added that bringing in foreign currency up to €10,000 into the country would not face restrictions and that amounts higher than that are allowed through the framework set by CBI.

In a previous measure, CBI also restricted the amount of foreign currency citizens can hold outside of banks to €10,000. It warned in a statement that if people failed to abide by the cap, they risked prosecution for “smuggling”.

After initially cancelling the allocation of hard currency to students studying abroad, the central bank on Thursday released a statement, capping the allocation of hard currency for students at €1,000 per month and for the annual tuition at €15,000.

The rial's slide, which accelerated from the early days of the current Iranian year (started March 21), caused concerns among the public and the business community. The crisis, the worst in five years, was also a blow to the administration of President Rouhani who had made forex market stability a tenor of its campaign promises.

Explaining the situation to lawmakers on Tuesday, Seif said fluctuations in the currency market had no economic justification.

“Non-economic factors ...?have fuelled the problems. Our enemies are not sitting idle either, as they create international crises to destabilize the economy ...?Otherwise we have sufficient foreign exchange resources."

Addressing the government's Economic Council on Thursday, President Rouhani said the good thing about the recent forex decision is that importers and manufacturers can plan for the future, which gives assurance about the prospects of foreign exchange market stability.