Iran Government to Expand Secondary Forex Market

EghtesadOnline: As the negative consequences of the government’s policy in enacting a single exchange rate for the US dollar are becoming clearer, report from local media suggest that the government is finally prepared to entirely abandon that policy.

News ID: ۷۴۵۷۳۱

29 July 2018

Mehr News Agency and the Persian economic newspaper Donya-e-Eqtesad both reported on Saturday that the government is about to eliminate a significant portion of goods from the list of imports eligible to receive cheap currency.

A government official told MNA on Saturday that the administration is preparing to add minerals and petrochemicals–the biggest sources of non-oil revenues–to the list of secondary market players and thereby transform it from its current anemic form.

The government decided to unify the US dollar’s exchange rate at 42,000 rials on April 9 in response to volatility that saw the rial sink to all-time lows against the greenback, according to Financial Tribune.

At the time, it also banned the physical trade of hard currency by exchange shops and the trading of the US dollar at any rate other than the official rate.

However, after a deluge of demand for imports at the attractive unified rate, the government had to allow limited free forex trade through a secondary market at “negotiated rates” between exporters and importers of small-scale goods.

The secondary foreign exchange market, which began work earlier this month, also failed to calm the market since, according to analysts, it lacked enough depth and scope.

It only allowed for the trade of currency earnings of 20% of non-oil exports, which included consumer products such as carpets and pistachios. If it weren’t for the repeated warnings of economists and some lawmakers, the government was considering limits on that rate, too.

According to Donya-e-Eqtesad, the decision to limit cheap currency earnings to vital goods, such as food and medicines, was taken on July 17 by members of Money and Credit Council–a policymaking body chaired by the central bank governor.

Among the benefits of the new policy mentioned by experts are the increased desire of exporters to offer the hard currency to market in full and not hide it, more transparency and removing the grounds for rent-seeking, giving the leading role to the market is setting the exchange rates and easing of budgetary pressures on the government.

On Saturday, the Central Bank of Iran–under the leadership of its new governor Abdolnasser Hemmati–increased the official exchange rate of the dollar and fixed it at 44,030 rials on Saturday. The rate has now surged by over 2,000 rials since April 9.

In the unofficial market, however, the forex and gold coin rallies kept raging. According to several reports, each USD was being traded at above 96,000 rials.

The benchmark Bahar Azadi gold coin was up by 6.6% on Saturday and hit a fresh record high of 37.31 million rials ($847 at the official exchange rate.)

The fresh volatility is thought have been fanned by the recent war of words between Iranian and US officials.

Last week, President Hassan Rouhani had addressed US President Donald Trump in a speech, saying that hostile US policies could lead to “the mother of all wars”.

A few hours later, Trump said in a tweet directed at Rouhani: “Never, ever threaten the United States again or you will suffer consequences the likes of which few throughout history have ever suffered before.”