Financial Tribune- Governor of the Central Bank of Iran Valiollah Seif said the drastic decision by the government to unify the US dollar’s rate does not mean that a fixed exchange rate system would be at work, as the rate would “fluctuate with market mechanisms”.
Seif said during a TV interview late Tuesday that the exchange rate was only fixed on April 10, but from that time only it would swing in line with inflation.
The government announced late Monday that it would enforce a single exchange rate to the dollar, banning all unregulated trading after the rial hit an all-time low.
First Vice President Es’haq Jahangiri said at the time that the official rate will be 42,000 rials to the dollar as of Tuesday. He said that trading at any other price was forbidden and would be considered “smuggling”.
The decision came after a two-day hike in prices of foreign currencies that saw the rial trading at 62,000 to the dollar—an 18% drop since Saturday.
The measure in effect ended the dual exchange rate for the US dollar and saw the official rate rise above 40,000 rials after 28 months.
The decision, however, left it unclear whether the rate would always be fixed by the CBI or get closer to a “managed floating rate” promised by CBI in the past but never realized.
At first glance, the decision had some precedence during the last currency crisis in 2012 when the then-CBI chief, Mahmoud Bahmani, unsuccessfully attempted to unify the exchange rate at 12,260 rials well below the market rate.
“The announced rate can fluctuate 5-6% depending on the inflation rate in Iran,” Seif said.
“But certainly we will not allow the imbalance [in forex rate] to intensify in the market.”
Latest CBI figures put the country’s inflation during 12 months to March 20 at 9.6%. In the spring of 2016, Iran’s inflation rate eased into single digits for the first time in a quarter century following the lifting of sanctions against Tehran after the implementation of the landmark nuclear agreement, known as the Joint Comprehensive Plan of Action, in January of that year.
Many pro-market economists as well as private sector figures had over the years urged the government to “moderate” the foreign exchange rate gradually to prevent price shocks like the latest that hit the markets in the early days of the current Iranian year that began on March 21.
On March 26, the rial slid to an all-time low against the dollar, with the exchange rate surpassing the psychological threshold of 50,000 rials. As if the first shock was not enough, this week it dropped to a record low of 60,000 rials against the dollar in the open market.
The foreign exchange volatility was not good news for the administration of President Hassan Rouhani who had made forex market stability one of the main tenets of his presidential campaign.
New CBI Measures
On Monday, CBI revealed new forex measures, announcing on its website that travel currency would only be allocated up to a ceiling of €1,000 or its equivalent in another currency once a year and €500 if the trip is made to a neighboring or allied country.
It added that hard currency for students and medical purposes would also continue to be provided through the two private-owned Saman Bank and Tejarat Bank
Earlier, it had announced that any trading of US dollar outside the banking system and the authorized exchange shops would be considered contraband.
Also, according to the new rules, the possession of foreign exchange by an individual is restricted to €10,000 or its equivalent in other currencies and anyone possessing more than this amount has until April 20 to either deposit it in a bank or sell it to the banking system.
Seif defended the decisions as the “best that could be made” under the current circumstances.
“Instilling transparency is a basic feature of these measures and this means serious enforcement of anti-money laundering and combating the financing of terrorism standards, which is a serious international topic,” he said.
President Hassan Rouhani also announced on Wednesday that the new measures were aimed at allaying the concerns of people, producers and businesspeople, and make the economy more transparent.