EghtesadOnline: Majlis Research Center, the parliamentary think tank, has released its first comprehensive report on the current foreign exchange market situation and the reasons it was gripped by wild gyrations in the final months of the previous fiscal year that ended in March and the following months.
The think tank dissects the real reasons behind the crisis and charts its rising trajectory. It also comes up with ways to prevent a further forex deterioration by suggesting the government pay attention to what it has regrettably ignored, including allowing market forces to play their role and improve the country’s international payment channels.
Prepared at the request of Mohammad Reza Pour-Ebrahimi, the chairman of Majlis Economic Commission–and a vocal critic of the government’s forex policy, the report reminds that the rial has lost more than 30% of its value during the three months to April (when the rial’s foreign exchange rate reached 60,000 rials on the free market.)
Primary, Secondary Reasons
The report categorizes reasons for the rial’s slide into primary and secondary ones that intensified this most recent volatility, according to Financial Tribune.
Primary factors, which have historically dogged the forex market, include the unbridled growth in liquidity, banking restrictions that prevented Iranian lenders from making international money transfers and allowed exchange houses to fill the vacuum, dependence on currencies such as the US dollar, reliance on SWIFT —the Society for Worldwide Interbank Financial Telecommunications (a near-universal secure messaging system that supports cross-border payments) and the perennial scourge of smuggling.
Secondary reasons that fanned the flames of forex volatility are identified as the acceleration of capital flight due to uncertainty in the country’s economic landscape, limitations in the way of forex channels such as the UAE, Turkey and China, which made forex transactions more difficult, risky and costly.
Rebuffing appeals from France, Germany and Britain, US President Donald Trump withdrew the United States earlier this month ago from the 2015 nuclear deal between Iran and six major powers.
Following the US move in May to quit the deal, the US Treasury Department announced the administration would reimpose a wide range of Iran-related sanctions after the expiry of 90- and 180-day wind-down periods, including sanctions on Iran’s oil sector.
The Iran nuclear agreement, formally known as the Joint Comprehensive Plan of Action, signed by Tehran and the five permanent members of UN Security Council–the US, France, Britain, Russia and China–plus Germany on July 14, 2015, imposed strict restrictions on Iran’s nuclear program in return for the loosening of economic sanctions.
Sounding the alarm on the threat of capital flight, the report said the country recorded an estimated deficit in balance of payments of over $14 billion and a $12 billion increase in banks’ forex arrears in the nine months to Dec. 21.
Adding that the country’s forex reserves have dwindled by $16.3 billion between March-September 2017 of that year, the think tank warns that after the US pullout from JCPOA and the reimposition of sanctions in the current year, economic circumstances are likely to become difficult.
Pointing to efforts made by the central bank and the government to control the forex situation, including unifying the USD exchange rate at 42,000 rials and requiring exporters to sell their export earnings to the banking system, the think tank finds fault with the government’s insistence on having a unified rate and its lack of recognition for an open forex market.
It adds that forcing exporters to sell their forex earnings to banks at the 42,000-rial rate would weaken exports since merchants will have little incentives to choose banks over the black market.
Another important missing piece, according to MRC, is that the government only focused on the domestic reasons of the volatility and became oblivious to improving access to Iran’s overseas assets ahead of the looming US sanctions.
MRC exhorts enhanced relations with Iran’s main trade partners such as China, Turkey, Russia and the EU to facilitate payment transactions, making use of further monetary swap agreements and the creation of a decentralized financial messaging system based on blockchain technology.
A change in “forex transfer ecosystem” by replacing UAE with more accommodating countries such as Russia, China and Oman is another advice by the parliamentary think tank to remove the external barriers to forex stability.