New Foreign Exchange Policy: Exporters’ Savior or Bane?

EghtesadOnline: The new forex policy, announced last week by the Central Bank of Iran, which will partially remove the ceiling for the price of the dollar and allow more freedom for market changes, has sparked a great deal of controversies.

News ID: ۷۸۳۷۵۵

20 August 2018

One such controversy was stirred by First Vice President Es’haq Jahangiri’s recent comment that the new policy would enhance the country’s export capacities, creating a unique opportunity for domestic producers to find new export markets and expand old ones, according to Financial Tribune.

To assess the Veep’s statement and clarify the effects of the new policy on exporters, the Persian weekly Tejarat-e-Farda interviewed Mohammad Lahouti, the chairman of Iran Export Confederation.

What follows is an account of the key points covered by Lahouti over the course of the interview:

“The government’s new forex policy may, on the one hand, increase exports, as the removal of the ceiling on the dollar price will indubitably increase export capacities,” he said.

Lahouti added that in a country where the rate of inflation is in the double digits, maintaining a command policy for the forex rate increases imports while preventing domestic producers from both competing in the national market and exporting their products.

“That is why moving toward normalizing the forex rate instead of setting a specific price for it is potentially a good thing, rendering the new forex policy positive,” he said.

“On the other hand, with the release of the forex spring, it (the normalization) might be good for exports in the short run. In the long run, however, it won’t be. As soon as the spring of the forex rate is released, the government will have to make rash decisions that would destroy market stability and increase unreal demand that has never been the wish of economic players and the private sector, be they producers or exporters,” he said.

The chairman of Iran Export Confederation said exporters and producers will be able to sell the products they have in stock, offering them at a comparatively lower price to gain a footing in their target markets.

“But taking into account the rising inflation, what will happen in the long run is that producers and exporters will have to pay more for their raw materials, which would in turn reduce their export capacities and result in a stalemate for both exporters and domestic producers. The inflation would also reduce the general populace’s purchasing power, posing another threat to domestic products market,” he said.

“The forex rate can in no way be seen as the sole criterion for supporting production and exports. Rather, the economy should become transparent, all the while stopping unwarranted command policies of the government both in law-making and forex rate establishment.”

Lahouti stressed that exports be expand only when all the parties involved are subject to rational rules.

According to the official, in order to achieve this aim, the government should only act as the market monitor and the forex rate should be managed flexibly, so as to prevent the accompanying rise and falls.

“This method would be in perfect alignment with the legal role of the Central Bank of Iran. The recent monetary policies and decisions point to the need for an independent central bank,” he said.

Lahouti noted that the management of the central bank by the government will cause irrevocable harm to the economy, as flexible management of the forex rate will not be possible if the central bank is not independent in handling the forex rate.

“The recent changes can allow the flexible management of forex market. However, essential goods are in need of constant circulation while they are not included in the first group. In other words, production units or investors will have to increase their capital to two or three-times their original amount, a feat most of them may not be able to achieve,” Lahouti said.

“If the government succeeds in meeting the needs of these units, say through the National Development Fund of Iran, not only would the units boost economic growth, but they would also be of great help in generating employment and added-value for the government.”

The new forex policy categorizes importable products into four groups: the first group, dubbed “essential commodities”, includes basic food and pharmaceutical products and will receive the dollars it needs at subsidized government-issued rate; the second and third group, including raw materials, intermediate goods and machinery, as well as consumer and manufactured products, will receive currency on the basis of Nima (the Persian acronym referring to the Forex Management Integrated System that allows the forex rate to be negotiated by exporters and importers at roughly 2.5 times the subsidized rate). The fourth group includes products whose import is banned until further notice.