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June 2017, No. 84


Opinion

 

Increase in Foreign Exchange Rate,
Natural Response of Iran Economy


The current situation of the Iranian economy is such that tools that can help maintain and strengthen the competitiveness of production do not exist any more.


Iranís economy in terms of degree of development is an economy transiting from reliance on resources to efficiency. The composition of production and export of such an economy is more based on the raw materials, mineral products and goods with a relatively low added value; therefore, the degree of complexity of production and export is relatively low and such an economy is devoid of diversified leverages for the development of efficiency and reliance on it as well as innovation and new technology-based production.

In the meantime, the current situation of the Iranian economy is such that tools that can help maintain and strengthen the competitiveness of production do not exist any more. Iranís economy is typically an economy with very high bank interest and the rate of inflation despite the decline in the past few years, is still higher than the world average; it is an economy which has a complex situation in terms of improper regulations and business conditions; therefore, while in a condition in which we are deprived of the leverage of competitiveness or enjoy the least of it, we are forced to pay more attention to other tools one of which is the foreign exchange rate.

Foreign currency rate, or in other words the upward trend of foreign currency rate which can somehow compensate for the impacts of inflation and high bank interest rates and undesirable working conditions, under the status quo is inevitable for Iranís economy. Until the time when the government is in control of foreign currency rate by using the highly powerful petro dollars, this rate will be suppressed after a while and the stability resulting from it will boost in a few years timeframe. Under such circumstances, almost all the production sectors will take advantage of this change rather than making loss, because their competitiveness will be preserved.

Given that composition of Iranís economy is more with the products with low value-added and raw materials, generally with the change in foreign exchange rate, they would find more maneuvering room for preserving competitiveness and more export. This point should be taken into consideration that increase in the foreign currency parity rate, if it is in the form of bouncing and within a short period of time and in the form of severe fluctuations (up and down), will render help to no economic sector; therefore, the intention is a moderate increase in the foreign currency rate in line with covering the costs caused by inflation rate, undesirable working environment and high bank interest rates.

This moderate increase will create balance in the market. Such a policy cannot be continuously followed up. If we succeed in holding the inflation rate below five percent after decades, if we keep the bank interest rate one digit, and if we can build up a revolution in the working environment, the foreign currency rate tool will not have its efficiency; but because this is not our situation and we have not reached the proper conditions with our foreign competitors and the average global rate, the foreign currency rate is among the least leverages and tools that can keep Iranís economy competitive and compensate for the recession of the production sector to some extent.

On the other hand, the effect of the increasing foreign currency rate on the peopleís life is something always considered by economic policymakers. Peopleís livelihood more than anything else and at any rate, will be harmed when there is no income in that family and the breadwinner of the household is unemployed. This is the highest level of vulnerability that can be imposed on the middle and lower class strata. This situation is experienced when the economy is in recession or it witnesses continuous low growth and status of production and employment units is undesirable.

As a result, the most important help that can be offered to the vulnerable masses is to provide the condition so that improvement in the economy will be made and unemployment rate will go down. To create job opportunities, the general status of production by using the tools we have mentioned, should be placed in the condition of preserving the current employment and in continuation in creation of new job opportunities.

Of course, the favorable condition is creation of new employment through which the high unemployment rate could be compensated. By the assumption of employment stability, increase in foreign currency rate will leave a limited impact on part of the household basket which has direct dependence on the foreign currency rate: Specifically, consumer goods or imported capital goods of the household.

As to consumer goods, it should be said that the majority of the imported consumer goods are luxurious or semi- luxurious to which a very low share has been allocated in the average family basket; therefore, the household basket will not be seriously and greatly influenced by the increase in the foreign currency rate. If the foreign currency rate is increased in a bouncing way, what will cause pressure on the vulnerable strata is the increase in inflation rate that can generally leave its impact on all the commodities; but as long as the inflation caused by the monetary policies of the Central Bank and budgetary policies of the government is controlled, increase in the foreign currency rate will have no significant impact on inflation and finally on the living condition of the household.

Remarks by the honorable governor of the Central Bank on reducing the foreign exchange rate in the next three months, in view of this writer, have been made irrespective of the economic status quo of the country. Experience has shown that despite remarks by the CBI governors, increase in the hard currency rates on the basis of the real response of the economy, will stay and the rates will not go back to the previous periods.

If the government tries to commit such an action by resorting to the petrodollars, its harm on the economy will be even more. For this reason I consider this comment more as a bid to ensure the market and create stability and halt the rise in foreign currency rates. Otherwise, if the decision is seriously discussed in the Central Bank, more negative results could be anticipated for it.

Increase in the foreign currency rate under the status quo, is the natural reflection of Iranís economy and a sound and principled balance and its reduction cannot definitely have positive effects. In fact, if the CBI in the coming months succeeds in keeping the currency at its current rates, it would be the best decision. In circumstances under which the currency rate moves from its premium level towards a new balanced level, it is possible that emotional businesses and decisions in that period impose unreal changes on the currency rate; but when the currency rate reached a new level of balance, business will not take place and if the officials of the Central Bank announced the business as a reason for the increase in hard currency rate, they would create further commotion in the market.

If we take a look at the past, in the past few years when the currency rate experienced a sudden increase, remarks of the officials about brokerage and business in the market, prompted further tension in the market; but fortunately in this juncture such statements are heard less which shows the professional approach of the officials.


By: Pedram Soltani, Vice President of Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA)

 

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  June 2017
No. 84