News ID: 156416
Published: 0644 GMT August 07, 2016

Unification of forex rates vital

Unification of forex rates vital

The Central Bank of Iran (CBI) is intensifying efforts to unify the two-tier foreign exchange rate as part of its market reform policy to streamline the economy.

Currently, the official rate is about 31,000 rials per US dollar against over 35,000 rials on the open market.

The imposition of US-led sanctions during the second term of the previous administration (2009-2013) had thrown the foreign exchange market into disarray. The former government had to introduce a three-tier system to cushion the blow from the crisis. The gap between the first and the third rates climbed to over 300 percent in the dying months of the former government's tenure. This was because the rial had depreciated by 400 percent against hard currencies. Each US dollar was traded up to 40,000 rials during the peak of the forex crisis.

As soon as President Hassan Rouhani assumed office in August 2013, it formulated plans to rebuild the economy through reforms. Since then the CBI, in cooperation with other responsible bodies, has been pursuing plans to unify foreign exchange rates.

Sanctions posed a major obstacle to achieving this goal. However, grounds were prepared for overcoming the hurdles following the implementation in January of the nuclear deal signed in July last year between Iran and the P5+1 — the US, Britain, Russia, China, France and Germany.

Three days ago, the CBI stressed that the unification of forex rates will be vigorously pursued.

Last week, CBI Governor Valiollah Seif also authorized banks to trade in foreign currencies on the basis of open market rates. He said the order is an important step to replace the current two-tier foreign exchange system with a single one.

Seif also vowed that the unification plan will be implemented by the end of the current Iranian year in March 2017.

Officials say economic stability and calm in the market are essential to establish a single forex rate. Hence, they want to accurately assess likely consequences of the move.

 

 

Pros and cons of unified forex system

On the one hand, some experts have voiced concern that the system will be counterproductive. They say the unification of foreign exchange rates will remain elusive and only fuel anxiety in the market.

Such concerns are based on notions that economic and political developments have played a major role in triggering crisis in the forex market.

On the other hand, other economic pundits believe the unification of foreign exchange rates will mitigate the impacts of rent-seeking and will help drive forex dealers out of the market. Such pundits stress that economic transparency is the direct outcome of a unified forex system.

Amid such ideas, the market will determine whether such a system will be productive or counterproductive.

The government has not decided to unify forex rates overnight. It has devised plans for the last three years and weighed the pros and cons of the issue.

The CBI has stressed that the single rate system will be set based on market realities.

It means that the unified forex rate will be subject to fluctuations as in other countries. However, the CBI should monitor the market and adopt comprehensive approaches to forestall any economic upheavals which may plunge the forex market into turmoil.

 

 

Investment, forex market

In the wake of the nuclear agreement with major world powers, many foreign companies have rushed to the Iranian market to either resume or begin trade ties with the Islamic Republic.

Scores of agreements between Iranian companies and their foreign counterparts have so far been signed. Nonetheless, lack of economic transparency is still a major obstacle to boosting trade ties with other countries.

Undoubtedly, foreign investment is essential in helping states boost their economies. Foreign investors regard economic transparency as a prelude to concluding trade deals.

The unification of forex rates plays a crucial role in promoting   economic transparency since this will help investors draw up long-term plans for cooperation with their partners.

Meanwhile, the government should learn from the experiences of other countries which have succeeded in developing their economies. However, a successful economic model may not be useful in other countries.

The administrations can achieve its economic targets by combating economic corruption, preventing rent-seeking, and money-laundering. Apart from economic transparency, effective cooperation of the private sector, economic experts as well as the pursuit of clear and coherent economic policies are also crucial.

   
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