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EghtesadOnline: The Central Bank of Iran is willing to reconsider official foreign exchange rates to market rates if the government offers tax exemptions to banks, the CBI governor said.

Abdolnasser Hemmati made the offer in response to calls from stock market authorities for improving financial reporting of listed banks. Arguing that the official parity rates are incompatible with market reality, they say the parity rates banks use to prepare their financial statements distorts their profit-making potentials. 

Despite consistent criticism of the parity rates, the CBI says it assesses the financial records of banks based on real exchange rates as their overseas assets cannot be evaluated due to the US sanctions.

“Forex assets of banks include their unpaid debts owed by companies and their blocked overseas assets. Converting such arrears based on current exchange rates has its own flaws,” Hemmati wrote in a note posted on his Instagram late on Sunday. 

“Setting higher exchange rates is tantamount to creating fictitious income for banks,” he added. “That means presenting imaginary performance, which also create tax liabilities for banks.” 

He said the CBI is open to increasing the parity rates on the basis of which banks’ forex assets are changed into rials if tax breaks are offered to banks for extra income. 

“If rate corrections are to be effective in the price of banks’ shares, granting tax exemptions on increased earnings of banks is necessary until they change their forex into rials.” 

The CBI in March said official rates for foreign currencies, setting the euro parity rate at 129,000 rials and the US dollar at 110,000 rials.


Regular Updates

Official rates are the benchmark for banks converting their forex debts and assets into rials. As a matter of policy, the CBI regularly updates parity rates to be used by lenders as the basis for their financial statements.  

The last conversion rates must be used by banks to prepare or revise their financial statements for the fiscal year that ended on March 20. 

Observers say lower forex rates have a negative impact on banks’ balance sheets, and by extension, on the economy hit hard by the US sanctions and the coronavirus pandemic.

Low forex rates particularly impact the performance of banks listed with the stock market as their forex assets apparently are undervalued in their reports.

Official conversion rates announced by the CBI are almost 50% lower than the currency market.  

Earlier in the month the head of the Securities and Exchange Organization, Mohammad Ali Dehqan-Dehnavi, asked the CBI to reconsider the exchange rates. 

Dehqan-Dehnavi in a letter criticized the rates for converting currency assets of listed banks that have undermined their financial transparency and auditing standards. 


In Breach 

Pointing to the March conversion rates, the SEO boss said the listed banks draft financial reports based on incorrect information to which shareholders object. 

Citing a report by the Iran Audit Organization, he warned that banks have been violating audit norms in their financial reports. 

“As per auditing rules if there are multiple exchange rates, the foreign currency should be converted using a rate based on which the company makes future payments,” he said, reiterating the need for correcting banks’ financial reports.

Dehqan-Dehnavi stressed that the ill-advised practice has undermined transparency and efficiency of the stock market, adding that the SEO, as regulator of the market, has an obligation to protect the rights of millions of shareholders.    

Eighteen banks and credit institutions are listed with stock exchange, the biggest being the privatized Bank Saderat Iran, Bank Mellat and Tejarat Bank. These banks have a market capitalization of 5,900 trillion rials ($24.5 billion), accounting for 6.7% of the total market cap of the Tehran Stock Exchange and the junior exchange Iran Fara Bourse. 

Iran’s banking industry is among the top five players in the stock market placed after investment, steel and base metal, refineries and petrochemical companies.  


CBI Forex Banks