CBI Marching Toward Forex Market Stability

EghtesadOnline: With its foreign exchange package now in full swing, the Central Bank of Iran says it is aiming to expand the influence of newfangled tools in the medium term and establish a formal foreign exchange market that ensures stability in the long run.

News ID: ۷۸۱۸۲۱

21 February 2018

Ahmad Araqchi, CBI's foreign exchange deputy, announced on Sunday that the newly-issued foreign currency bonds are meant to "manage the market" and that more bonds will be issued in the future "to move toward a formal foreign exchange market," the bank's website reported.

In response to the recent volatility in the domestic forex market that saw rial lose 10% of its value within a couple of weeks, CBI announced that it would issue rial-based foreign currency bonds.

According to Araqchi, the currency bonds will be issued in rial but their value would be calculated in foreign exchange, Financial Tribune reported.

Investors will purchase the bonds in rial based on median forex rates recorded in the past month but at the time of maturity, the bonds will be reimbursed based on an average of rates recorded in the past recent week.

The one-year bonds will have a yield of 4% and two-year ones 4.5%. Considering the rate of inflation and the pace of rise in forex rates, a final yield of 26% are anticipated for the bonds, making them very attractive instruments.

Also included in CBI's forex package to encourage savers to keep their money in rials instead of hard currency, the CBI eased the cap it imposed in September on the deposit rates offered by lenders.

Banks are authorized for two weeks to offer interest rates of up to 20% on fixed one-year deposits, against the previous 15%. In another measure to stem demand for the dollar, the central bank has offered the presale of gold coins at attractive prices.

Araqchi said the informal forex market has created a hotbed for speculators and disruptors who fanned the flames of volatility, adding that CBI's trilateral forex package is a blueprint to stabilize the market.

"We hope that these measures, along with countering the disruptors through the Law Enforcement Forces, will bring back stability and calm to the market," he said.

Last week, Tehran's police, at the behest of the central bank, raided the hub of currency hawkers near the British Embassy and rounded up 90 traders who were deemed market disruptors.

Authorities also closed the bank accounts of 775 people suspected of distorting the foreign exchange market with capital movements totaling 200 trillion rials ($4 billion).

On Sunday, the rial traded at 46,130 to the dollar, up 1.8%, according to Tehran Gold and Jewelry Union's website.

Private Sector Response

The recent volatility has also provided the business community with an opportunity to air its grievances about the government's forex policies that it has often decried as inefficient and anti-business.

In the latest meeting of the board of representatives of Iran Chamber of Commerce, Industries, Mines and Agriculture on Sunday, its president, Gholamhossein Shafei took  the government to task for not heeding expert advice all these years to let the exchange rate rise gradually in line with the inflation.

"Another issue is the issuance of currency bonds by the central bank from the start of this week, which runs the risk of a lukewarm reception by investors since in the past buyers were paid back in official forex rates and now have a hard time trusting the banking system," Shafei said in comments posted on ICCIMA's website.

Iran operates two exchange rates, a free market rate and an official rate used for some state transactions set by the central bank, which is heavily subsidized.

The ICCIMA chief also took jabs at the temporary decision by CBI to increase deposit rates, saying that the bank did not seek the advice of private sector in this regard and called on the bank not to put the brunt of the decision on the business community and use its own resources to cover the costs.

Shafei noted that the way out of the current form of decision-making is to allow CBI to function independent of the government so that it can devise policies that have the least negative impact on the monetary sector.