Economic, Political Climate Will Govern Forex Market Stability

EghtesadOnline: Except for brief volatility in the first weeks of the new fiscal year (started March 2019), the currency market has seen relatively stability throughout the year.

News ID: ۷۴۹۰۲۴

25 November 2019

The Central Bank of Iran on several occasions has taken the credit for maintaining the stability by what it says is through balancing demand and supply.

Despite escalation of tensions following the re-imposition of hostile US economic sanctions and the ensuing economic pressures, the CBI has so far managed to keep the market calm by directly participating in the forex market through its affiliate moneychangers, according to Financial Tribune.

Maintaining the stability in the second of half of the year is contingent upon de-escalation of political tensions and taking appropriate measures to meet the budgetary constraints on the part of the government, according to Ferial Mostofi, head of the Investment Commission at Iran Chamber of Commerce, Industries, Mines and Agriculture.

In an interview with the bimonthly Tazehaye Eqtesda -- affiliated to the Monetary and Banking Research Institute, she predicted a worsening recession emanating  from deep budgetary constraints in the second half of the Iranian fiscal year as a possible cause of the potential market turbulence.

6 Months Later

Recalling the sharp cuts in crude oil export revenues due to the US sanctions on oil export, she forecast current budget deficit at 1,200-1,400 trillion rials ($10 billion- $12.5 billion), adding that the effect of budgetary constraints on markets would be more conspicuous in the second half of the year.

“The important point to consider in predicting the outlook for markets is how the government is going to plug its deficit holes,” she said.

If the budget deficit is to be compensated by borrowing from the CBI, prices will rise and the currency market would obviously be no exception, she noted.

As another probable scenario, issuing debt securities will also compound the recession, according to Mostofi.

However, she concurred that the fragile currency market would be more vulnerable to political tensions.

“Perhaps, if only economic factors were in play, we wouldn’t see the drastic currency hikes by the yearend,” she said, adding that any political development can undermine the market.

The Ministry of Economy announced plans to issue Islamic financial securities worth 380 trillion rials ($3.3 billion) to partly plug the budget deficit.

The “general revenues” in the budget are forecast at 4,480 trillion rials ($39 billion), which is 5% higher compared to last year’s budget.

The government originally predicted oil revenues to be in the region of 1,370 trillion rials in the current fiscal year, which accounts for 36% of the government’s total revenue. The figure, ironically, indicates higher dependence on oil compared to the previous budget.

With the new US sanctions taking a toll on the key oil sector, the government is under mounting pressure to find alternatives to compensate the diminishing oil export revenue.

With the intention of crippling Iran’s economy, US President Donald in May 2018 abandoned the nuclear deal Iran had signed with the six world powers in 2015 and announced tougher sanctions against Tehran.