Economists call for floating foreign currency rates

Iran Daily – Iran’s currency continues to hit fresh lows against the US dollar these days. This has raised serious concern among different people from walks of life, including economic experts.

In an interview with Persian daily Donya-e Eqtesad, Parviz Aqili Kermani, an economist, and Mohammad Fetanat, former head of Iran’s Securities and Exchange Organization (SEO), expressed their views on the crisis in the foreign exchange market.

Fetanat said that interest rates on bank deposits affect the forex market. Iranian officials, he added, regard the interest rates as a key factor to contain a drastic fall in the value of the rial.

The economist said high interest rates, which are aimed at driving investors away from the dollar, create conditions for bubbles in the currency market.

Fetanat warned that once these bubbles burst, the entire economy will be adversely impacted.

The ex-official of the SEO said such a phenomenon will push banks to attract more deposits to be able to pay the high interest rates.

As a result, he said, banks have to make huge losses.

Fetanat pointed out that the Central Bank of Iran (CBI) uses its discretion and injects more dollars to prevent a decline in the value of the national currency.

He said about $20 billion are needed on a yearly basis to stabilize foreign currency rates.

The former SEO official said the government has only resorted to the two above-mentioned procedures but failed to turn to modern and creative approaches.

Fetanat voiced concern that the continuation of such methods will deal stronger blows to the banking system. He called for a floating foreign currency rate system to prevent fluctuations in the forex market.

Aqili Kermani also called for adopting rational approaches to monetary policies. Iran, he pointed out, has been dependent on oil income for decades and efforts should be made to wean the national economy off such revenues.

He agreed with Fetanat on creating floating foreign exchange rates to encourage exports.
He also voiced opposition to the unification of foreign exchange rates saying ‘basic conditions’ have not been created for this.

He underlined that the supply-demand system must determine the fate of the forex market.

The economist noted that the government should use the official exchange rate of the dollar to import essential goods such as medicines, corn and wheat and allow traders to use the open market rate for transactions.

Aqili Kermani stressed that the government should press ahead with a two-tier exchange rate system until economic conditions improve and non-oil exports balance imports.