Seif Says Forex Rate Unification Underway, Exact Timetable Unclear

EghtesadOnline: The gradual move toward unifying foreign exchange rates has started but the timeframe for its realization depends on a variety of factors, says the governor of the Central Bank of Iran.

News ID: ۷۷۱۲۶۷

13 November 2016

“Our first aim is to reach a point where we can adopt the single currency rate mechanism and lead to the intended calm and stability. After that a forex derivatives market will also be set up,” Valiollah Seif said during a tour of the 22nd Press Exhibition in Tehran, Exim News reported.

According to Seif, who has routinely talked about putting a permanent end to the dual exchange rate regime – in place since the currency crisis of 2011-12 sent the rial crashing – by the yearend (March 20), the necessary conditions to take the long-awaited decision are emerging. “The discrepancy between the rates in the official and free market has narrowed significantly and we are not very far from a single rate system.”

Emphasizing that the process will be gradual, the CBI head said it is already underway but will depend on the “speed of correspondent banking relations” to actually see the unification.

“Our plan is not to unify rates in one single stroke. We have started a series of measures and when they come to fruition we will announce it to the public,” Seif said. “The time for the announcement will be when all the people can feel it happening. Thus, we will have a measured movement toward unified rates.”

One of the most fundamental prerequisites to this, he adds, is “for our banking relations to be normalized” which are currently not satisfactory. He says a positive trend toward realizing this goal has taken form, albeit sluggish. “But we will try to accelerate this trend and manage to put ourselves in a situation where we can officially announce it to the people.”

On whether or not bank interest rates – currently 15% – will again change by the end of the year, he deflected the question by saying that the rates have their own process subject to supply and demand. However, the CBI will supervise to ensure that the fluctuations are within an acceptable range.

“However, the current rates are not bad.”

Trump Effect Overrated

The CBI chief and head of the Monetary and Banking Research Institute (MBRI) Ali Divandari commented on the election victory of Donald Trump in the United States and its potential future implications for Iran’s nuclear deal. Both men downplayed any consequential impact that the ascendancy of the real-estate tycoon to the White House would entail for Tehran, according to Financila Tribune.

Seif said the reality is that nothing can be predicted, but “there are signs indicating that the nuclear deal (between Iran and the six world powers) will certainly continue on its current course.”

“Given the efforts undertaken in the past, the ambiguity surrounding the most important major international banks [wanting to work with Iran] must be cleared,” he said. The senior banker, however, said since Trump has a “more clear” view of economic issues, this could have some benefits for Iran.  He did not elaborate.

In comments regarding the upset victory of the Republican candidate, Divandari said “all international markets have reacted to outcome of the US vote and it is only natural for us to see similar reactions in our country.”

The head of the MBRI then spoke of the possible impact of the election on rate unification, noting that the central bank moves on its own path and is not influenced by international markets in implementing its policies and plans.

According to the official, internal machinations carry much more weight than external factor simply because the form of change in Iran differs from that of the world.

He explained his point by referring to the recent changes in the value of the greenback. “For example, the dollar declined in many parts of the world (after Trump beat his Democratic rival Hilary Clinton in the Nov. 8 vote) but it went up in Iran,” said Divandari. “We have a different outlook toward this subject and the CBI will maintain its control over forex rates by way of the floating system.”

Foreign exchange rates and gold coin prices surged on Wednesday in Tehran market following Trump’s surprise victory that took almost the entire world by surprise.

The MBRI head also pointed to the “complicated” and “multi-faceted” issue of  foreign exchange rates, saying a timetable for implementing the single rate cannot be predicted and it is not even clear whether or not it will be done by the end of the current year.

“If the (right) conditions and requirements are not there, it might not happen by the yearend (March 2017) and could be delayed,” he said. “If the conditions are there, the plan might be executed before the year is out.”

He concurred that forex rate unification is a very complex matter that is tied to the inflation rate and commodity prices. Indeed, it is a scheme that cannot be implemented at short notice, he added.

“Wide-ranging variables actually influence currency rates and that must also be taken into consideration.”