THE REAL RIAL

Iran 2017 | FINANCE | FOCUS: EXCHANGE RATE UNIFICATION

Since the establishment of the Islamic Republic of Iran, the country's exchange rate regime has been subject to frequent changes. Indeed, the majority of the people in Iran have yet to experience the day that their currency, the Iranian rial, represents one unambiguous value.

The policy of operating multiple exchange rates has been called into question on numerous occasions over the years, but only now is the will to change course present. The private sector, financial institutions, and governmental authorities are unanimous in view that a single exchange rate for the Iranian rial has to be pursued. In spite of this broad support for exchange rate unification, the Central Bank of Iran (CBI) is waiting for the right macroeconomic conditions to take action.

The open market has long determined the value of a parallel exchange rate. Next to it, different official rates have co-existed side by side, to serve the purpose of a resilient economy. Following the unification of multiple exchange rates in 1993, the consequent weakening of Iran's fiscal position eventually compelled the CBI to introduce a depreciated “export rate," which existed next to the official rate. The official rate was used for government activities, such as repayment of external debt, imports of strategic goods andservices, and oil and gas receipts. The fixed export rate was meant for all other trade transactions.

In 1997, a new floating exchange rate was introduced through the Tehran Stock Exchange (TSE) that became known as the TSE rate. Importers and exporters were no longer obliged to trade through the fixed export rate, which had put exporters under pressure as the gap with the parallel exchange rate increased over time. They were now allowed to trade foreign-exchange certificates for hard currency on the stock exchange, until the TSE rate replaced the export rate in 2000 and became the country's sole official rate. Next to it, still, the open market dictated different terms of trade. As the free market rate served as an indicator of the mood of the Iranian economy, the differential with the official rate has gone up and down, but it has continuously been a complicating factor for cross-border trade.

Criticizers of the dual exchange rate system have been vocal in their discontent, identifying practical shortcomings and structures that undermine the Iranian economy. Masoud Khansari, Chairman of the Tehran Chamber of Commerce, Industries, Mines and Agriculture, has argued that the current system paves the way for rent-seeking and a lack of transparency, and that it encourages the allocation of subsidies to imports. A study conducted by the Tehran Chamber of Commerce reveals a correlation between operating a dual exchange rate policy and economic inefficiency, bureaucracy, and a weakening position of the private sector in favor of the public. Vice Governor of the CBI Akbar Komijani has been particularly outspoken, saying a multiple exchange rate regime facilitates corruption and throws the economy off course. A unified exchange rate, conversely, is expected to boost foreign demand for Iranian products and stimulate non-oil exports, as the floating rial is likely to be cheaper than the current official exchange rate.

CBI Governor Valiollah Seif has expressed his determination to revert to a single, unified exchange rate as soon as possible, but still has reservations concerning Iran's reentry into the global financial arena. Although many Iranian banks have established correspondent banking relations with foreign banks, Seif would like to see a more extensive network before implementing the rate unification. The end of the previous Iranian year, in March 2017, turned out to be too early, and the CBI has set its eyes on the end of the current Iranian year. This target is supported by the IMF, which sees that the groundwork has been laid by decreasing the gap between the two rates and shifting imports to the open market rate.

The need for one unambiguous exchange rate is undisputed, and Rouhani's administration has made it clear that unification is only a matter of time. This year might be the year that importers and exporters know what their rial is really worth.