Forex Fluctuations, Their Impact on Iran's Economy

February 7, 2001 - 0:0
TEHRAN The rise in the price of oil in international markets and the resultant improvement in the foreign currency situation of the country led to a steep devaluation of the dollar against the rial in nonofficial exchanges last year.

The price of $1 U.S. came down to Rls.8,440 in February 1999 from Rls.9,000 in September of the same year and is now about Rls.7,900.

Different views have been raised in recent months by state economic officials and experts on the reasons for the devaluation of dollar as against the rial.

Governor of the Central Bank of Iran (CBI) Mohsen Nourbakhsh told a press conference in November that efforts to check the further depreciation of the dollar are under way and assured exporters of non-oil commodities, who are the major sufferers of a dollar devaluation, that an exchange rate for the dollar against the rial would be fixed.

To implement a forex stabilization policy and to prevent further depreciation of the dollar's exchange rate, the CBI raised the dollar quota of each passenger and the Ministry of Commerce also further freed imports so as to raise the demand for the dollar.

Minister of Economy and Finance Hossein Namazi, however, has put forward a different opinion on national forex policies.

One month after Nourbakhsh's foreign currency statements, Namazi told an economic seminar that one should not keep forex rates high, particularly when a monopoly is enjoyed by the system.

Namazi said that any effort to try to devaluate the national currency would be "nontechnical and illogical."

"Determining forex rates should be a function of supply and demand," said the minister.

To obtain expert views on the reasons for the fluctuations in the rates of foreign exchange and an optimal forex policy for the Iranian economy considering present conditions, the Economy Desk of IRNA turned to Moussa Ghaninejad, a faculty member of the Oil Industry College, and Yadollah Dadgar, a faculty member of Mofid University in Qom.

Ghaninejad, referring to Namazi's statements, reiterated that foreign exchange rates should be determined by market conditions and the invisible laws of supply and demand, adding that if the Iranian market is to operate freely then all markets, including that of foreign currencies, should be free.

The academician said that under present conditions Iranian markets can be described as "closed" and restrictions are being imposed on imports.

He said it is important to entrust the task of determining foreign exchange rates to the forces of supply and demand. He further expressed surprise that the minister of economy and finance spoke for the first time of putting trust in the open market.

He said CBI policies on forex stability was in accordance and consistent with the condition of the country's economy.

Under present conditions, he said: "If we take the dollar as a good, its price too should be set by the same rules that set the prices of other goods."

He said that Rls.7,900 is a desirable rate for the dollar under present conditions as the CBI believes.

He added that a determination of the forex rate through the rules of supply and demand and without the intervention of the CBI would be harmful.

He said the establishment of a forex deposit account was a proper measure taken by the government and Majlis to ease the influence of fluctuating oil prices.

He opined that during years which see a rise in oil income, part of the revenue is deposited in the forex deposit income and during years where oil income is low this reserve can be a stabilizing factor.

According to the economy expert, policies adopted in recent years is driving the economy toward achieving stability in forex rates.

He cited another adverse effect of failure to stabilize forex rates, I.E., the tendency to encourage capital flight from the country.

He complained against the lack of a coordinated economic view within the various government financial institutions and blamed the phenomenon that has led to many problems from the lack of consensus.

Meanwhile, Yadollah Dadgar, a faculty member of the university of Gom, said the CBI effort to keep forex rates high was discouraging exports.

On the CBI policy, Dadgar said the poor initiatives of the CBI and its mere expression of concern on the need to reduce exporters' revenues were harming the economy.

Pointing to the impact of the dollar exchange rate and current prices in the country, Dadgar said the high rate of exchange of the dollar is the cause of industrial underproduction.

"For more than 23 years industrial equipment and machinery in the country have not been overhauled due to expensive parts and high cost of experts," he said, adding that the CBI forex policy has not achieved success.

On the desirable rate for the dollar, Dadgar said there are different schemes to determine what would be a desirable forex rate but that the CBI governor was insistent on his view.

He commented that in the short run it would not be logical and possible for Iran to have each dollar at less than Rls.5,000.

Furthermore, Dadgar said that the structure of the Iranian economy is inexplicably tied to the dollar and that in the absence of proper monetary policies the CBI even uses the dollar to control the amount of money circulated in the country.