0303 GMT August 18, 2019
The imminent removal of the major portion of Western sanctions will lead to the release of frozen assets of the government and the Central Bank of Iran.
In addition, the lifting of the sanctions will reduce the cost of exports and imports; thus increasing the government's hard currency reserves. The unfreezing of the assets will most probably also fetch a considerable amount of revenues.
A large number of domestic experts are concerned about the sudden flow of substantial forex reserves to the country fearing that in the wake of this, the dollar will greatly plummet, falling considerably behind production costs in Iran. Such a phenomenon can seriously slow domestic production growth and employment.
To drive the point home, let's imagine that Iran's forex reserves have grown $40 billion, and the CBI has permitted for a drop in the dollar rate in Iranian forex market. The move will reduce the price of exported and imported items, intensifying the competition for Iranian products in international and domestic markets. The failure of domestic producers to keep up with their international rivals, will waste great deal of their capitals forcing them to cut back spendings by downsizing the workforce. Although eventually new investments will be made and new jobs will be created — which are not conducive to the production of exchangeable goods and services— the unemployment rate will go up for a while and domestic economy will become vulnerable to future drop in revenues.
Perhaps, two immediate solutions are doling out cash subsidies among domestic producers, exporters and importers while restricting imports. Nevertheless, these strategies are basically not conducive to any remarkable economic achievement. They will eventually reduce the competitiveness of domestic producers, lead to a wastage of monetary resources and promote economic rent seeking and corruption. Domestic economic experts maintain that it is more logical not to reduce the exchange rate for dollar.
To achieve this, the government is required to meet a number of prerequisites and adopt certain complicated procedures. A strategy to prevent a decline in forex rates is to reduce the direct flow of the [to be released] funds into the economy and, instead, hold them in the National Development Fund. This requires that the government deposit a portion of the revenues in the NDF for future use in foreign investments. The revenues thus generated can later be used to balance the forex market in the long-run. This strategy was first adopted by Kuwait some 60 years ago and is currently becoming popular among developing countries, particularly oil rich states.
Although Iranian governments have every once in a while adopted this policy, they have never pursued it seriously. A common question posed by Iranian policymakers and people have always been why the revenues have not been invested in domestic projects. This is while, the government does not intend to freeze the assets and on the contrary aims to spend them carefully at the proper time.
Using the funds in establishing lucrative businesses and consequently improving economic stability have always been hindered due to domestic policymakers' failure to formulate long-term strategies, low public trust in the policymakers and poor in-depth information on the issue.
Moreover, particularly after the victory of the Islamic Revolution (1979), Iranian capitals have always been [and still are] faced with the risk of being frozen by the world powers.
Another policy to stem a decline in forex rates is that the CBI adjust the dollar rate by undertaking the arbitrage transaction itself. This move alone, however, will not solve the issue because a high dollar rate means that the government has spent a considerable amount of liquidity on importing more hard currency reserves which will further push inflation up. In fact, like the mechanism triggered by lowering hard currency rates, in case the CBI opts to maintain high forex rates, domestic production costs will substantially rise, making imports more economical for the government than stimulating production. In such circumstance, the rise in the dollar rate, which is constantly accompanied by an increase in inflation, will not stabilize the relative value of the dollar in the market. This is because the policy will immediately accelerate the growth in the prices of domestic products and therefore will not change the relative value of the foreign currency. It will only contribute to a hike in inflation rate.
Some domestic economists have proposed that to keep the nominal and relative rate of the dollar at a favorable level concurrently, the CBI has to employ a neutralizing method in arbitrage transactions, i.e. after the forex incomes are converted into national currency, the CBI sells bonds in the market to control liquidity and inflation growth. This strategy, which was earlier successfully executed by the People's Bank of China, can be a short-term solution. However, selling bonds to neutralize the adverse impacts of the liquidity growth resulting from the increased imports of hard currency resources will lead to a rise in bank interest rates and a reduction in motivations for investing in the production sector. The measure will also impose heavy costs on the CBI to pay high interest rates. In addition, expat's capitals will also flow to the country in the hope of earning annual interests thus forcing the CBI to restrict their flow.
A key solution to lowering production costs is to invest in training expert workforce, boosting productivity and other factors contributing to a growth in domestic output. When, directly or indirectly, the country earns considerable revenues, domestic producers' income increases and consequently, the competitiveness of domestic goods declines. The only solution to this is to spend surplus forex incomes on maximizing the manufacturers' productivity.
As for Iran, different methods such as reforming the performance (policymaking, providing services and enacting the strategies) of state organizations, improving infrastructures and training and educating domestic workforce can be used to improve productivity.
Domestic workforce is required to learn to use complicated and modern technologies.