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EghtesadOnline: The new forex initiative has only managed to fix major policy mistakes of the past two quarters, which is not enough to control profiteering in the foreign exchange market.

The above statement was made by economist Vahid Shaqaqi Shahri in an interview with ISNA.

The new forex policy announced by Abdolnasser Hemmati, as his first move as the new head of the Central Bank of Iran, has managed to prevent the rise in forex market prices and consequently of gold coins, to some extent. 

Some experts believe that Hemmati’s move stems from his field of expertise as an economist, which makes him more successful than Valiollah Seif, the former head, in scaling macroeconomic factors. Seif was lacking an eagle-eye view as a result of his accounting background, according to Financial Tribune.

However, despite the macroeconomic prowess of Hemmati, the issues involved seem to be more complicated. With the announcement of the new forex plan by the central bank, prices inched down in the forex and gold markets. 

According to the Gold and Jewelry Union, prices in the foreign exchange market and the gold market are normalizing and getting in line with world prices. However, the fall in gold and coin prices cannot reduce prices in other markets because, in addition to the fact that prices do not tend to fall even after major increases, the subsidized dollar does not equally accrue to all importers, which stops prices from being reduced substantially.

A faculty member at Kharazmi University of Tehran, Shahri argued that the forex plan has solved the problems of the misguided policy of the past three months, but cannot stop profiteers in the forex and gold markets.

The economist says the only way to offset the negative effects of the proposed forex policy would be to amend the tax system and define new tax bases. By setting taxes on capital gains, wealth taxes and income taxes, it would be possible to control the forex market. Additionally, the subsidies system must be reformed.

The current exchange rate is naturally inflationary, Shahri said, adding that these inflationary outcomes will directly affect the lower classes. That is why the government, by reforming the tax system, must find enough resources to increase the income of lower classes.

The government should increase the monthly subsidy for poor classes by at least three times the amount now, otherwise the purchasing power of people would be reduced and as production costs rise, the market will be locked. 

“The Iranian economy does not have the strength to accept the 80,000-rial dollar–the rate of non-subsidized dollar,” he said. 

When the dollar is priced so high, purchasing power decreases, the supply of goods will be slowed and, as a result, the market will fall into stagnation, meaning many producers will lose the ability to purchase equipment and pay the production cost.

Money needs to be redistributed. If capital and trading in the foreign exchange market are taxed, it would be possible to use the gains to support lower classes.

“It’s not time to impose a tax on production,” he said, “in the current situation where producers are already under a lot of pressure, so they should not be overburdened. Instead, the rich should be subject to new tax bases to prevent profiteering in the forex market and procure sufficient resources to support the weaker strata at the same time.

 

Iran foreign exchange market Forex Initiative Vahid Shaqaqi Shahri