Iran Gov’t Moves Closer to Market Economy

EghtesadOnline: The government has eased foreign exchange rules and allowed money exchangers to resume work at open market rates, as part of the latest rescue package intended to calm the volatile market.

News ID: ۷۴۵۸۱۳

07 August 2018

In a complete about-face from the policy of the last four months, the government intends to keep its hands off the market and allow “supply and demand” to set the rates for foreign currencies.

Abdolnasser Hemmati, the newly-appointed Central Bank of Iran governor who announced the new policies on state television late Sunday, hoped that his bank will never have to interfere in the market so that it will “balance” by itself, CBI’s website.

“Among the problems of the first round [of policies] was the announcement that currency trade in exchange shops is smuggling which caused problems but through the new directive approved by the government, exchange shops can once again engage in buying and selling currency to travelers and for other services such as medical [needs],” Financial Tribune quoted him as saying.

He said, however, that the scope of activity by bureaux de change will be for small-scale deals, which would be about $2,000-10,000.

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.

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

Criticism about the government’s forex controls came to a head when reports of widespread abuse and rent-seeking were disclosed by the lucky few that had access to cheap currency.

It also caused demand for imports to skyrocket, leading to a subsequent decline in exports.

No More Forex for Overseas Travel

Another contentious point was the allocation of currency to people traveling abroad, which was criticized as profligacy. The government allocated €500 and €1,000 to people travelling to neighboring and distant countries respectively.

Hemmati said the travel currency will be allocated at free market rates, but those who already possess payment orders will receive their currency at the official rate.

“The new package will take effect on Tuesday,” he said.

US President Donald Trump’s decision to pull out of an agreement to lift sanctions in return for Iran curbing its nuclear program contributed to a run on the rial, as companies and savers bought hard currency to protect themselves from the looming economic sanctions.

Hemmati said during his televised speech that the government has been confident enough to liberalize the forex market one day before the first batch of US sanctions arrive , because the government has enough knowledge about the domestic economic conditions and markets.

In Washington, US Secretary of State Mike Pompeo said the White House would make an announcement on Monday detailing the reimposition of sanctions on Iran that Trump has ordered for this week.

Hemmati added that the central bank would allow a “managed float” of the rial’s exchange rate and try to avoid using up its reserves to support the currency.

“My policy is to preserve the foreign exchange reserves of the central banks and it is expected that due to its depth, the secondary market will affect other markets, too,” he said.

The expansion of secondary market will come through the currency earnings of petrochemical firms and steelmakers being injected into the market.

By removing the old four-tier classes of imports, Hemmati said, only the Ministry of Industries, Mining and Trade will decide which imports are necessary.

Markets welcomed the new measures, with rial gaining on the unofficial market, trading at 95,000 to the dollar, compared with 100,000 on Saturday.

The gold coin was also down with the benchmark Bahar Azadi dropping by more than 6% and fetching 34.60 million rials ($786 at the official exchange rate).

Other Measures

To encourage Iranians to return their hard cash to the economy, the plan allows the central bank to set up dollar savings accounts for ordinary people with the central bank guaranteeing their return plus the interest.

Hard currency will still be made available at a subsidized rate for purchases of essential goods and medicine.

In July, Iran opened the Secondary Forex Market for importers of non-essential goods that are not eligible to receive the preferential rate from the central bank.

Starting this week, Washington will reimpose sanctions on Iran’s purchases of US dollars, its trade in gold and precious metals, and its dealings with metals, coal and industrial-related software.

The United States has told third countries they must halt the import of Iranian oil from early November or face US financial measures.