CBI Against Market Intervention

EghtesadOnline: Central Bank of Iran's Governor Abdolnasser Hemmati said the regulator's policy under his watch continues to be non-intervention in the foreign exchange market.

News ID: ۷۸۳۷۱۰

18 August 2018

"We have said repeatedly that we do not interfere with the [exchange] rate and the market will stabilize itself," Hemmati told reporters on Wednesday after the weekly meeting of the Cabinet.

He added that the main weight of the currency market is directed toward the Secondary Forex Market and that currently 95-96% of imports take place in the secondary market, ISNA reported.

Hemmati noted that the sheer size of the secondary market will exert its impact on stabilizing the rates, Financial Tribune reported.

The Secondary Forex Market is the platform created by the government and CBI for exporters to offer their hard currency earnings to importers of goods and services at rates negotiated between the two sides.

"The currency stabilization pivot is the secondary market that is gradually deepening and its rates, as pointed out by the president, are not very acceptable and therefore should decline," he said.

"CBI acknowledges that exporters themselves should notice that nobody would buy hard currency at such rates and they should bring down their prices."

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.

At the time, it also banned the physical trade of hard currency by exchange shops and the trading of US dollar at any rate other than the official rate.

However, the policy led to an unprecedented rise in demand for imports at the cheap currency rate, forcing the government to ditch that policy in favor of more open market ones.

Criticism of the government's forex control also intensified when reports of widespread abuse and rent-seeking by the recipients of cheap currency were disclosed.

On August 6, it eased foreign exchange rules and allowed money exchange offices to resume work at open market rates as part of the rescue package intended to calm the markets.

At the time of announcing the new policies, Hemmati hoped that his bank will never have to interfere in the market so that it will "balance" by itself.

Different Rates

Reports from the unofficial market on Wednesday showed that the dollar fetched about 106,000 rials and exchanges houses also sold the US dollar almost at the same rate.

In Tuesday's secondary market, a dollar bought roughly 80,000 rials, Fars News Agency reported.

Kamran Nadri, an economist, said one reason is that currency buyers in the secondary market are importers who are not willing to accept an exchange rate higher than 80,000 rials for the dollar because production costs will not make it economically-viable.

"But players in the open market are not importers but those who are either pursuing capital flight, or worried about their future and look to hard currency as a way to preserve the value of their assets," he said.

The volatility intensified after US President Donald Trump announced in May that he is pulling his country out of the multilateral nuclear deal Iran signed with world powers in 2015.

Earlier this month, Washington reimposed sanctions on Iran’s purchase of US dollars and its trade in gold, precious metals, metals, coal and industrial software.

On Monday, Iran's Leader Ayatollah Seyyed Ali Khamenei criticized wrong policies that have led to market upheavals, saying that market mismanagement was more to blame for the economic hardships than the sanctions imposed by the US.

The Leader has also called for a tougher approach in bringing to justice economic disruptors and those that hoard staples and essential goods for profiteering.