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June 2018, No. 87


Opinion

Taking a Wrong Course of Action!

Dr. Mousa Ghaninejad, Economist

The task force policy of fixing the foreign exchange rate was exercised with the argument that turbulence in the foreign exchange market was not economically motivated and that behind-the-scene security issues, and sometimes indescribable issues due to the nature of the matter, played the main role in this turmoil. Assuming this proposition is correct, there are a few important questions about the solution proposed by the relevant authorities and its future direction.

To ignore these questions may impose by far heavier expenses on the national economy. At first, it seemed that the government task force policy, for the reasons mentioned, was provisional and aimed to overcome a so-called security issue. But with regard to the subsequent positions adopted by the government officials, the assumption has been created that this scheme was not in fact temporary and merely security-oriented but constitutes the government’s foreign exchange policy for the years to come. If this assumption is true, it must be seriously warned that the government has taken a wrong and dangerous course that is reminiscent of the ‘coupon-based economy’ of the 1980s.

The most important point here is perhaps the emphasis on not recognizing any rate other than the one announced by the government. This is a declaration of war on the laws of economics. Recognizing or not recognition of the government would have no effect on the functions of the laws of economics. The same applies to the law of gravity which cannot prevent harm to someone who wants to fly by jumping out of his high rise apartment window. As long as there is a higher demand for foreign exchange than the government’s declared official rate, and as long as the government fails or does not want to respond to this demand, the unofficial market will inevitably be there. The fact is that the government will not be able to solve the problem by erasing the problem itself.

The competent authorities can temporarily shut down any market in an emergency state in order to restore calm but they cannot impose their will on market mechanisms. The idea that the government can identify all types of foreign currency applicants and meet their demands and falsely respond to “legitimate” demands is far from real. The officials should admit that a market parallel to the official market will quickly arise, and the negation of the reality is neither possible nor expedient. The government has to accept without any ifs and buts the reality of the existence of this market and transactions by citizens thereby reducing the risk of trading in this market, so that additional and unforeseen costs are not imposed on the applicants. Then, the government should apply the only appropriate solution, namely unification of the foreign exchange rate within the shortest possible time to prevent corruption and waste of resources.

The procrastinations by the authorities responsible for reforming the exchange rate under conditions that double digit inflations drastically reduced the value of the national currency and the refusal to unify the exchange rate despite repeated promises was one of the big mistakes of the government, which ultimately paved the way for inelastic fluctuations. In the meantime, this state of affairs encouraged the opponents and enemies of the government to enter the foreign currency market and disrupt it. If the exchange rate in the past years had been adjusted in a timely manner in line with economic logic and was unified there would be no ground for turbulence in the foreign exchange market so that non-economic factors could take advantage of it.

In any case, the wrong direction the authorities have taken about foreign exchange policy will not yield any result other than what the enemies of the government desire. This policy would sharply escalate the ineffectiveness of the economic system, the waste of resources, and corruption and public discontent. This is a trap the enemies have knowingly or unknowingly set for the government. We hope the government be careful not to fall into this trap by relying on the knowledge of economists and experts and by contemplating the necessary measures.

 

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  June 2018
No. 87