Forex Rates Jump After Gov’t Stops Cheap Currency Allocation

EghtesadOnline: Foreign exchange rates in the unofficial market registered gains on Sunday after the government stopped all currency allocation at the unified rate of 42,000 rials.

News ID: ۷۸۳۳۰۴

18 July 2018

The measure to suspend the allocation of cheap currency was enforced by the Ministry of Industries, Mining and Trade after reports of widespread abuse by importers were disclosed in recent days.

The US dollar's exchange rate, which had embarked on a falling trajectory since the Central Bank of Iran launched the secondary market last week, fell below the support level of 80,000 rials.

On Sunday, the rial was reportedly traded at around 82,000 rials in Tehran's open market, according to Financial Tribune.

The gold coin, whose rally had also cooled in recent days, experienced a similar trend. The benchmark Bahar Azadi coin fetched 28.92 million rials ($372 at the official exchange rate) on Sunday in Tehran's market–up 1.23% on the previous day.

As reported by the Persian economic newspaper Donya-e-Eqtesad on Sunday, on the order of Industries Minister Mohammad Shariatmadari, currency allocation for all goods, even those whose imports are deemed vital to the country , has been suspended to implement a mechanism that guarantees transparency.

The government decided to unify the US dollar's exchange rate at 42,000 rials on April 9 in response to volatility that saw the rial sink to all-time lows against the greenback.

The Central Bank of Iran has only allowed minor increases to the rate so far. As of Tuesday, the bank had put the rate at 43,270 rials.

It also banned the physical trade of hard currency by moneychangers and the exchange of US dollar at a rate other than the official rate, ensuring the public that it can fulfill all the currency needs at the new rate.

However, as the rate was significantly lower than in the unofficial market, competition began among importers to receive more of the cheap currency.

In response, the government resorted to a multi-tier scheme based on which imports will receive their needed foreign currency at different rates, as per their priority with the least important class of imported goods, which the government has deemed "luxurious", facing an import ban.

"Essential" goods such as staples like oil, rice and wheat will receive their currency needs from oil revenues at the 42,000-rial rate, which could be further subsidized to 38,000 rials.

The next priority includes "raw materials and intermediate goods", the forex requirements of which will be met from the export earnings of petrochemicals, steels and mineral products.

The third category includes "consumer goods", the hard currency for which will be provided from exports that are not required to be registered in Nima. This is the group targeted by the government for the secondary market, where rates are determined at negotiated rates between exporters and importers.

Fighting Corruption

At the forefront of the government's measure to suspend currency allocation at the unified rate is to fight rent-seeking and misuse that has since occurred.

The initiative gained momentum after CBI, at the behest of President Hassan Rouhani, published the full list of companies that have benefited from foreign exchange for their imports at the preferential rate.

Earlier, Information and Communications Technology Minister Mohammad Javad Azari-Jahromi had disclosed the list of handset and mobile device importers who had received their foreign exchange at the official rate.

A glance at the lists made it clear that some major companies, which had received cheap currency, sold their goods at open market rates or kept the hard currency for themselves without undertaking any import.

After the controversial import of some 5,000 luxury cars was exposed while auto imports were prohibited last year, President Hassan Rouhani issued an order on Saturday asking his Cabinet and the judiciary to take immediate action.

Some analysts, along with private sector leaders, however, point to the fact that instead of focusing energy on nabbing wrongdoers, the government should first eliminate the grounds for rent seeking by restricting the allocation of subsidized currency.