Iran aims for free market exchange rate policy

For full coverage of business developments in Iran and the Middle East, see MEED.

Iran plans deregulate the rial exchange rate around six months after the relaxation of nuclear-related sanctions, which could take place by the end of the year, Reuters has reported.

Iran has two exchange rates: an official one set by the authorities and a free market one. The official rate is $1= 29,970 to the dollar. The free market rate is $1=35,740.

“We believe it’s not the duty of the Central Bank of Iran to determine the foreign exchange rate, this rate will be determined by market mechanisms based on the real factors of the economy,” Reuters quoted Central Bank of Iran governor Valiollah Seif as saying on 18 November.

“The only duty that the central bank of Iran has is to cap the range of fluctuations in the market and smooth the foreign exchange shock in the market,” Seif said. “I’m not saying we don’t care about the unofficial rate, I’m saying the market should be acting on the real economic trends and the central bank should limit any potential shock.”

Seif was speaking on the sidelines of a conference in Frankfurt.

The official rate was introduced to reduce the impact on the Iranian economy of new sanctions introduced in 2012. This failed to contain the rate of inflation, which reflected the sharp fall in the free market value of the rial against most international currencies. The central bank countered inflationary pressures by lifting interest rates, but this process could go into reverse to reflect the sharp fall in the rate of price increases. Inflation is now running at just over 10 per cent on a year-on-year basis.

“All the interest rates are far above the inflation rate. Based on the decrease of the inflation rate, interest rates should also be adapted,” Seif told Reuters. “The central bank is doing its best to accelerate this trend of pushing down interest rates in line with the inflation rate.”

“The interbank money market rate is above the realistic criteria, this is not good for growth in the national economy,” Seif added.

Commercial banks have announced plans to cut deposit rates to 18 percent. The government has said it wants to cut interbank rates to 26 from 29.

Iran’s economy has the potential to grow by around 8 per cent a year over time, once sanctions are lifted and the country repairs its relationship with the international community, Reuters quoted Seif said as saying.

Iran’s economy grew by around 3 per cent in real terms in the year to March and the government has already committed to an action plan that could boost this rate further, Seif said.

“The government has committed itself to a disciplined and transparent fiscal and monetary policy with a view to promoting growth and tacking high inflation,” Reuters quoted Seif as saying.