Dual Requirements of Forex Rate Unification

EghtesadOnline: In addition to establishing ties with major international banks, the plan to unify dual foreign exchange rates requires prerequisites, the Central Bank of Iran’s former deputy for foreign exchange affairs said.

News ID: ۷۷۹۱۳۱

13 September 2017

“Foreign currency offered at official rates is one of the hurdles on the way of unifying the rates because within this framework, some goods become subject to forex offered at rates lower than that of the open market, which is currently about 600 rials higher,” Seyyed Kamal Seyyed Ali also told Fars News Agency.

Noting that ending the allocation of official forex rates will entail transparency and better pricing, he said studies show that goods imported at official rates do not ultimately differ from similar goods imported at open market rates, in that they do not benefit the consumer i.e. the final claimant.

According to Seyyed Ali, the official forex rate gives rise to rent-seeking behavior on the part of the importer, Financial Tribune reported.

He also referred to foreign currency sold at official rates by the banks for the purpose of travel, saying that before its abolition, it faced a similar condition.

On Wednesday, the central bank issued its latest directive, decreeing that as of Monday, banks are not to offer the previous $300-capped travel currency at official rates and are free to offer it without a cap at open market rates like moneychangers.

Seyyed Ali, who supports the removal of travel currency ceiling at official rates, believes that no significant problem would arise if CBI had chosen to do so years ago because people need considerably more than $300 for their travels and the currency offered at banks only provided a small respite for travelers.

As to the second requirement for rate unification, the pundit pointed out that if forex revenues from exports are injected into the markets, it would account for 80% of the import needs of the nation.

“Under such circumstances, the central bank would no longer be pressured for providing foreign currency, but this depends on creating modalities to redirect the exports revenues,” he added.

The former official said CBI could obligate exporters to sell their foreign currency revenues to the banking system, but could also present them with tax rebates and export incentives.

Although, he noted, it would also be beneficial for exporters to offer their export revenues to certified moneychangers or foreign branches of local banks because “the main goal here is for CBI to be able to observe the process so that it can have a clear sense of the foreign currency reserves of the country and make plans based on that”.

Seyyed Ali believes that CBI is right to hold out on rate unification until all the prerequisites are in place because when the rates are unified, the banking system must be able to meet all the currency needs of the country for it to take hold and remain stable.

As to whether it would be feasible and reasonable for the central bank to implement rate unification in a climate where forex rates are gradually on the rise, he said it would work because the increase is not out of the ordinary.

At present, he notes, the annual inflation rate stands at around 10% that renders the current forex rate increase of 8% necessary to avoid an imbalance that would hurt exports.