Assorted Factors Undermine Iran Currency Market

EghtesadOnline: Responding to the new chaos in the currency market, the Governor of Central Bank of Iran Abdolnasser Hemmati blamed it on developments unfolding in the political, social and economic arena.

News ID: ۷۴۹۱۵۰

10 December 2019

Speaking to reporters on the sideline of a startup event on Monday, Hemmati said the gasoline rationing scheme in mid- November set off the first spark in the currency price rise that was followed by a wave of social unrest and violence across the country.

“As we all know, this was due to the price shock emanating from the hike in pump prices after which a [negative] psychological climate dominated the market,” IRIB news quoted him as saying.

On midnight Nov 14, the National Iranian Oil Products Distribution Company (NIOPDC) announced that gasoline had been rationed and prices raised between 50% to 200%. The new rates came into effect immediately, Financial Tribune reported.

The controversial move sparked nationwide demonstrations by people concerned about the inflationary impact of the new prices at a time when they are already under severe economic pressure as the purchasing power takes a beating and prices of everything go through the roof.

The CBI boss pointed to speculation about the estimates and projections in the March 2020-21 budget bill as another driver of the current trend in the forex market.

Relative Calm Ends

Price speculations come largely from the army of avaricious middlemen and their agents who seek to jack up forex rates and an extra buck.

After sailing in relative calm waters for more than 70 days,  currency prices started rising since mid-November amid heightened uncertainty among investors about what lies ahead for the economy and the nation.

On Monday, the US dollar jumped 4,000 rials gaining about 5% compared to Sunday’s close. The greenback fetched 137,000 rials in Tehran, the highest since mid-June.

One euro was sold for 150,000 rials and the pound sterling fetched 183,000 rials at the weekend.

The USD has gained more than 18% against the rial since November 10 when it was worth less than 113,000 rials. Rates at the CBI-affiliated moneychangers were slightly lower at 135,500 rials.

As for other factors affecting the domestic currency market, Hemmati pointed to the unrest in neighboring Iraq, which temporarily disrupted exports to the Arab country. He also referred to the rising demand for foreign currency when people normally travel during the Christmas and New Year festival season.

Normal During Yearends

Observers say higher currency prices at this time of year is normal as traders need foreign exchange to settle their payments with overseas partners and suppliers. This is because most foreign firms close their books at the yearend and prefer their foreign partners settle their payments.

Asked how the central bank intends to tackle the situation, Hemmati said “the CBI does not intend to draw on excitement”.

Elaborating the point, he said, “We are very patient and are not going to be excited.” He sought to assure the people and said the CBI is doing all it can to restore stability to the currency market “as it has done in the past”.

Since autumn 2018 and after a period of steep volatility in the currency market, the CBI has played an active role in the sensitive currency market through its affiliated moneychangers.

The intervention mainly involved balancing supply and demand by manipulating currency prices and pushing for disciplinary action to curb harmful speculative activities.

The CBI ordered its moneychangers on Monday to extend their working hours to 17:00 p.m during weekdays to “improve services to customers”.