Forex Rate Unification Needs Real Rates

EghtesadOnline: The unification of foreign exchange rates should be accompanied by setting real exchange rates, otherwise the plan will fail as in the past, the head of Iran Export Confederation said.

News ID: ۷۷۷۲۰۳

24 June 2017

Mohammad Lahouti’s statement came after the Wednesday meeting of Money and Capital Markets Commission of Iran Chamber of Commerce, Industries, Mines and Agriculture, during which Gholamali Kamyab, the Central Bank of Iran’s deputy governor for foreign exchange affairs, voiced his support for unifying the forex rates.

“Everyone in the meeting talked about foreign exchange rate unification while no one mentioned the necessity of moving toward real forex rates,” Lahouti was quoted as saying by IRNA.

He added that exporters don’t favor higher exchange rates, but they demand the implementation of a law based on which the inflation rate determines the forex rates, according to Financial Tribune.

According to a report by the Institute for Trade Studies and Research (affiliated to the Ministry of Industries, Mining and Trade), the government has kept the exchange rate lower than its real value by 38% and 11% in 2013 and 2016, respectively.

Lahouti said the rule for taking into account  the ratio of the price level abroad and the domestic price level for determining the exchange rate has existed since the third five-year development plan(2000-4), but previous administrations never implemented it.

“If the forex rates do not increase in tandem with inflation, that would hurt domestic production since it ruins their competitive edge, as a result of which imports and smuggling will significantly increase,” he said.

The ITSR report indicates that in the last Iranian year (ended March 20, 2017), the value of commodities smuggled into Iran hit $15 billion, which is equivalent to 22% of all imports (both legal and smuggled).

Lahouti emphasized that the important issue is to support exports without increasing the forex rates since it would not help exports, as a commensurate increase in inflation and forex rates will ensure the continuation of exports.

Domestic production in Iran is highly subsidized by the state. However, overshadowing the country’s protectionist policies is the practice of allocating cheap, subsidized foreign exchange by the government to imports, which runs counter to the spirit of boosting domestic industries.

Iran currently uses two exchange rates: the free market rate, which stood at 37,440 rials to the US dollar on Friday, and an official exchange rate for state transactions fixed by CBI at 32,491 rials on Thursday.

In order to bridge the gap between the two rates, the government began to gradually increase the official exchange rate for it to get closer to the unofficial market rate and tried to shorten the list of imports eligible to receive foreign currency at official rates.

Top economic officials, including CBI Governor Valiollah Seif and Economy Minister Ali Tayyebnia, had repeatedly promised that the forex rate will be unified soon after all the prerequisites are in place.

Lacking Banking Ties With Qatar

Lahouti noted that despite the statements of CBI’s deputy governor for foreign exchange affairs at the Wednesday meeting, Iran’s banking relations are not the same as they were before the nuclear sanctions and exporters still use high-risk runaround methods to transfer their money because it is not available through the banking system.

“European banks do not accept Iranian commodities’ certificates and most of Iran’s trade is with Iraq, Afghanistan and the UAE where the only correspondents are Iranian banks since foreign banks don’t work with Iranian exporters,” he added.

Since the removal of international banking restrictions in January 2016, Tehran has secured links with only a limited number of smaller banks as US sanctions remain in force and large foreign institutions still fear potential fines.

Lahouti said Iran cannot get hold of Qatar’s market due to its lack of banking ties with Iran.