Al-Monitor | Bijan Khajehpour: After months of volatility and devaluation of the national currency, the Central Bank of Iran (CBI) introduced a new policy package on Aug. 5 that so far has failed to calm the foreign exchange market. The daily fluctuations persist and foreign exchange bureaus have been reluctant to buy or sell hard currency, protesting the CBI�s mercurial policies. Thus there is a need to take a closer look at the CBI�s policy package and its potential impact on the economy in general and the value of the rial in particular.

There is no doubt that political and psychological factors have unsettled the foreign exchange market, but it is also clear that the government and CBI have failed to balance supply and demand at this crucial juncture. A closer look at the recent decisions with regard to foreign exchange rates exposes the structural weaknesses that negatively influence the economy.

Until April 9, Iran had a two-tiered exchange rate system. The official rate, which stood at about 37,000 rials to the dollar, was used for the importation of licensed goods and services. The free market rate, which hovered around 45,000 rials per dollar in mid-March, was used for all other purposes. It had remained relatively stable since the first election of President Hassan Rouhani in 2013. Since 2015, the Iranian authorities have been promising to unify the exchange rates, but had delayed the plan multiple times.

The sudden pressure on the exchange rate in March this year resulted in a devaluation of the rial and compelled the government to fast-forward its unification plan. It announced a unified exchange rate of 42,000 to the dollar and banned forex bureaus from operating. As Al-Monitor predicted in May, the clampdown on forex bureaus and the government�s inability to supply the market with enough hard currency led to a panic and by early August the rial had lost some 60% of its value on the free market.

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