Will Iran unify exchange rates at expense of rial's value?

Business Materials 12 September 2017 17:46 (UTC +04:00)

Baku, Azerbaijan, Sep. 12

By Farhad Daneshvar – Trend:

The recent remarks by a senior financial official on Iran’s plans to unify the country's official and open market exchange rates have sparked off heated media debates.

While the critics of the plan have voiced concerns over a possible devaluation of the national currency, rial, the government says that it will not allow rial lose its value against the foreign currencies.

Gholamali Kamyab, the foreign exchange deputy at the Central Bank of Iran (CBI) suggested on Monday that his organization may adopt its policies on the unification of the exchange rate as of March.

“The Central Bank has no accurate time schedule for implementing the plan on unifying the currency rates but considering the existing plans, the implementation would begin by the end of the current (Iranian calendar) year (starting March 20)”.

Gholamali Kamyab further added that the CBI’s decision on the elimination of the travel currency, subsidized dollars for travelers, was in line with the plans on the unification of currency rates in the country.

Unification of rates requires proper banking ties

A group of Iranian commentators over the past day have questioned the credibility of the decision as this is not the first time that the CBI announces plans to introduce a single rate.

The CBI since 2012 has repeatedly said it is going to eliminate the multi-tier exchange rate in the country but it has achieved no obvious result over the past years.

“Presence of an active international banking system for establishing banking ties with the world is among the needs for unifying the currency rate. I am not sure if the government has held talks in this regards with the international banks. However, the government is currently minimizing the use of currency [offered with the official rate] in the country’s economy,” said Farhad Fozouni, a member of Tehran chamber of commerce, in an editorial published on Shorou economic daily.

Saying that a relatively stable currency market over the past four years has contributed to the gradual improvement of the business environment in the county, Jahan-e Sanaat, an Iranian economic newspaper, on Tuesday criticized the plans on the unification of currency rate suggesting the plan once materialized would worsen the economic situation in Iran.

“If the idea is fulfilled, we should witness the beginning of a dark era in the country’s economy as well as disturbance in the industry and production [sector]”.

The editorial also interpreted the unification of currency rates as a decline in the value of rial against foreign currencies.

Elimination of "travel currency"

Under a previous regulation, banks were offering foreign currency with a cap of $300 to Iranian travelers at official rates that were about 5000 rials lower for each dollar compared to the open market rates.

On September 11, the CBI barred banks from supplying the subsidized dollar to Iranian travelers who plan to go abroad.

Seyedrazi Hajiaghamiri, a member of Tehran chamber of commerce, said that the decision on the elimination of the subsidized currency for Iranian travelers may cause a surge in the value of foreign currency against the Iranian rail.

“It appears that the government has decided to allow the rate of foreign currency slightly grow as the rate of dollar has increased in the Iranian market over the recent days. Of course the government is capable of preventing the surge in the [US dollar] price through pumping oil dollars but government, so far, has not made such a decision,” he said.

This is while the supporters of the decision say that the elimination of travel currency would help the government get a better use of its resources in order to boost the economy as well as create new jobs.

Despite the country’s positive economic growth the unemployment rate still remains high with over three million of unemployed individuals.

Possible outcomes of unification of rates

There is about a 15 percent difference between the official and free market exchange rates of the US dollar in the current situation in Iran.

The consumers would probably show a negative reaction to the decision on the unification of exchange rates as a hike in the value of the foreign currencies as well as an increase in the inflation rate are among the possible outcomes of such measure.

On the other hand the supporters of the plan believe that the ground for the implementation of such measure has been paved as the country’s economic growth currently is in a positive area and it is experiencing stable days.

This is while a group of exporters and key players of the economy normally prefer the real rate of the foreign currency rather than the subsidized prices.

The government spokesman Mohammad Baqer Nobakht on Tuesday vowed that the administration would protect the value of national currency.

“We do not want to carry out this [unification of rates] at the expenses of the devaluation of national currency. President [Hassan Rouhani] last year did not agree to this measure. He believes that the unification of the currency rates should take place after stabilizing the market”