When rial finished its four-month decline sliding to a record low of 60,000 rials against the dollar on Monday from 43,000 rials in early January, the administration eventually made the long-waited serious decision to curb the rampant foreign exchange market by unifying the official and open market exchange rates.

Political forex market

“The government will sell the U.S. dollar at a rate of 42,000 rials to all individuals and businesses,” First Vice-President Es’haq Jahangiri said in a statement recorded for state TV on Monday evening, underscoring that anyone found selling the dollar at rates higher than 42,000 rials “will be dealt with severely” by judicial authorities and the police.

“We do not officially recognize any other rate than this one," he said. “From Tuesday, any other price that’s offered in the market will be considered contraband, in the same way that illegal drugs are contraband.”

Shouldering the blame for the created unregulated market on enemies of the Islamic Republic and of the Rouhani administration, Jahangiri described that since the country’s export revenues has injected tens of billions of dollars of foreign currency into Iran in recent weeks, the experienced unstable market was the result of a wider political plot seeking to discredit the administration and foment instability.

Economy in good shape

Government spokesman Mohammad Baqer Nobakht made some remarks on Tuesday about the decision saying that if the administration had not announced the price of 42,000 rials for dollar the rate would definitely continue its rise.
 
According to some experts, the rate could augment up to 70,000 rials, which would entail a galloping general inflation and incur an irreparable loss to domestic production and exports of Iranian products.

As Nobakht told reporters, in the second half of the previous Iranian calendar year (September 22, 2017- March 20, 2018) some profiteers commenced exchanging their money to dollar in a bid to prevent depreciation of their assets which created a fake demand for the foreign currency and made the market rates inflated.

Assuring the Iranian nation that the market will not experience any other similar shocks, the government Spokesman reminded that despite the recent foreign currency oscillations and regarding its impacts on main economic sectors and indices, the country’s general economy is in good shape.

Euro instead of dollar

The governor of the Central Bank of Iran (CBI) Valliolah Seif attended the parliament on Tuesday morning to explain about the government’s recent measures and future policies.

Answering the MPs lashing out at him, Seif named “uneconomic reasons and uncertainty about future” as the major reasons for the markets instability.

He also re-announced that Iran will replace dollar with euro for its financial transactions since the green back does not play a significant role in the country’s foreign trade.
 
Soon to judge future

In fact, Iran has long been trying to unify its open market rate, used for most commercial transactions, with the official rate, which is a subsidized rate that is only available to government departments and some importers of priority goods.
However, as Nobkhat said on Tuesday, some of the applied policies to unite two-tier system, including issuing rial bonds with an annual 20 percent interest rate and preselling of Bahar Azadi coin in the hope for absorbing some of the market liquidity, have not been potent and need some modifications, which will be put into practice in near future.

Despite the announced official rate for the dollar, as reported, most foreign currency markets in Tehran were semi-closed while just few ones did some limited transactions on Tuesday. The queues for purchasing dollar were still long on the day under the direct control of the police force. However, other foreign currencies including Pound and Euro did not inch down and the gold coin price witnessed fall.

Some of the main unanswered questions about the future of domestic forex market are posed as:
•    How would the over-night made emergency measure to unify official and free market rates work for the market, specifically in the long-run?
•    Could the government seize the short-term fluctuations in the foreign currency market as a strategic opportunity to modify the market’s structure via registering a single digit rate?  
•    Will the announced 42,000 rials rate for dollar go through an upward trend in future or will float based on the market’s situation?
•    The budget law for the current [Iranian calendar] year has estimated the rial-to-dollar exchange rate to be between 35,000 rials and 38,000 rials. Regarding the officially announced rate how is the government going to deal with the budget deficit?
•    How will the Trump administration’s decision on Iran’s nuclear deal, which is to be announced on May 12, affect the country’s currency market?

HJ