Currency market stabilizes as rial slightly gains

Financial Tribune- The end of the current Iranian year in March will bring about an end to currency fluctuations plaguing the market, as increased supply helps moderate the market, predicts the director of the Central Bank of Iran’s Exports Department.

“We forecast that currency fluctuations in the market will be curbed by the yearend. Considering the rise in supply from the central bank and from non-oil exports, especially major petrochemical companies, fluctuations will be controlled and the downward trend in exchange rates will continue as it happened in previous years,” ILNA also quoted Samad Karimi as saying.

Referring to past experiences, he said currency rates peak in the Iranian month of Dey (Dec. 21-Jan. 19) and this year will be no different.

“But business demand goes up dramatically at the end of December and businesses settle their accounts during this time, which will stoke demand and hence forex rate swings,” he added.

The US dollar has gained significantly against the Iranian rial during the past weeks, with the dollar parity rate crossing the 40,000-rial threshold last week. The greenback was quoted for 41,000 rials in the free market on Wednesday, but lost some ground the following day as the rial strengthens to 40,400 per dollar.

The rial’s small rally, which began on Wednesday, is the first sign that the currency market is regaining some degree of stability.

Karimi said the central bank and its Export Department in particular endeavor to support real demand, but noted that while unofficial trade, contraband goods and currency smuggling have declined in recent time, “they still heavily influence currency rates”.

The CBI official pointed out that the high volume of smuggling can fuel demand for foreign currency, producing adverse effects.

If the central bank and other relevant official bodies focus on curbing the influence of illegal trade, he added, currency fluctuations will not recur.

According to Karimi, the greenback’s strengthening at the global level, a rise in precautionary demand for foreign currency, a hike in speculative activities, the conversion of assets into foreign currency, new demand and smuggling of contraband and currency, paired with an increase in business demand, have contributed to the currency market unease.

On measures undertaken so far, Karimi said the central bank has managed market expectations and increased supply in the interbank and unofficial currency markets.

CBI is also selling currency to banks, “meaning that the banks can purchase from us in the interbank market at open market rates”.

Unification of Rates

The central bank official also commented on the much-touted plan to unify the foreign exchange rates.

“Rate unification will be accomplished when the gap between the official and market rates is no more than 2%, but there are certain requirements and the central bank’s assets must turn into liquid,” he said.

Iran operates two exchange rates—a free market rate and an official rate used for some state transactions—set by the central bank at around 32,376 rials on Thursday.

In recent months, the central bank has raised the official rate gradually to reduce the gap between the two. It wants to unify the exchange rate, make the economy more efficient and create a level field for private firms competing with state institutions with access to cheaper foreign exchange.

The CBI official said non-oil exporters, specifically petrochemical exporters, help moderate the market by supplying currency and are an integral part of the market.

Karimi concluded by declaring that the central bank will increase forex supply in the official and unofficial markets until the end of the year, “meaning that by supporting the market and reducing demand, fluctuations will also die down, which will help balance the market”.