Changes in Iran's CB Forex Market Policy

EghtesadOnline: Governor of the Central Bank of Iran says the bank has put an end to the unreasonable practice of injecting foreign currency into the market to control forex rates.

News ID: ۷۵۰۱۶۰

06 June 2020

"Pumping forex into the market was the only tool for controlling foreign exchange rates in the past decades. But now we have taken a more thoughtful approach towards the market," Abdolnasser Hemmati told parliament on Tuesday.

He did not say if and to what extent the new approach had been successful.

"The CBI injected nearly $280 billion into the currency market in the past 15 years to control exchange rates and, by extension, the rate of inflation," he said.

But "large portions of that money was taken out of the country," he complained without naming names or saying how and by whom such huge amounts found their way out.

It also was not clear why all the state oversight bodies, including the CBI’s own investigative departments, were unable to stop the colossal theft of national wealth.

The CBI shifted its focus from the market itself to factors impacting currency rates from 2018 (such as unruly traders and street moneychangers), when Hemmati took office. "We also revised the policy of allocating foreign currency for (importing) basic goods."

The senior banker noted that with the new approach the CBI managed to purchase nearly $1 billion from the market and increase its forex reserves.

A report published in the Persian-language economic newspaper Donya-e-Eqtesad reported that the CBI has long relied on injecting hard currency into the market to be able to control rates in the past 15 years. The report said there exists a close relationship between oil revenues of the government and the volume of forex injections by the CBI.

The CBI pumped $55.3 billion and $49.7 billion into the market, respectively, in 2009 and 2010 which was the highest in the past 15 years.  Government income from crude oil export then was at an all-time high.

Hemmati's rare meeting with the lawmakers came amid high and rising currency rates in Tehran. Forex rates have been of the ascending order since the beginning of the current fiscal year (March 20) with the USD gaining more than 12% against the rial in two months.

Foreign currency rates had already jumped 58.5% in the last calendar month to April 19 in the secondary forex market, known as Nima, compared to the same month last year.

Nima is an online platform affiliated to the CBI where exporters sell their overseas currency and companies buy it for importing non-essential goods, machinery, equipment and raw materials. The rates are usually below open market rates.

Higher currency rates in the secondary market were attributed also to the CBI’s new policies calling for less intervention in the market and creating more space for export companies.

It appears that the CBI is exercising extra caution and has reduced currency offers on Nima due to uncertainties arising from the coronavirus pandemic and the battering of international oil prices.