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November 2020, No. 95


Q & A

A Clear Communication Policy


In the current situation, stray money is a lot. Inflation expectations are high and demand for durable goods, gold and foreign currencies is high.


Unstable inflation has always existed in the Iranian economy for the past 50 years; Ramin Mojab, economist, believes that one of the root causes of exchange rate shocks is generally high inflation; however, in the current situation, uncertainty about the future of the local currency (rial) has increased the level of forex fluctuations in the informal market even more. According to him, to manage these fluctuations, a real event needs to happen, and this event can be a signal from the government to the people that ďthe strategy of government is not to cut off from the whole world and turn to economic isolation.Ē 

Why the foreign exchange market is inflamed again and what are the determinants of the exchange rate in the current situation?

The problem I find in answering your question is that there is not much information and data available from these markets. That is, for example, if this question was raised in relation to the stock market, we could discuss hypotheses much more credibly. This is incomplete and non-transparent information. Even if someone says we have no foreign exchange market at all, I do not oppose him seriously. For example, we do not know the daily volume of transactions at any price. We know that there are many quantitative policies and specific restrictions in this market. You will encounter the figure of 42,000 rials for the price of one US dollar on the website of the Central Bank of Iran (CBI). Usually in our research, we consider the average official exchange rates and the market exchange rate to calculate a more realistic rate. Of course, I do not know how much the weights should be in the current period. But I want to emphasize that the informal prices we hear are the worst. Part of the import of basic goods does not take place at these prices. These are the prices you want to get beyond the mainstream foreign currency system.

There is inflammation here. The reason is clear. On the one hand, there are supply constraints. That is, a small amount of foreign currency is allocated to meet this type of demand. On the other hand, the demand is high. The future of the rial and other cash assets is so bleak in the eyes of individuals that they prefer to hold more reputable currencies. Of course, not everyone is looking for speculation. Many are just looking to protect the value of their money. Under these circumstances, a part may also be devoted to activities such as the smuggling of durable goods. However, this type of informal foreign exchange demand is higher than its supply and causes the inflammation we see. 

As mentioned, there are relatively bad expectations for the future of the rial. In the recent period, it seems that we are experiencing relatively high inflation. How much has the growth of the monetary base affected the increase in prices?

Historically, all of these problems have stemmed from the negative oil shock. But we know that if this shock was not negative, we would have had similar problems. That is, Iranís economy has inherently high inflation. Individuals, institutions, laws and regulations, etc. are arranged in such a way that there is high inflation in our economy. To say that the monetary base or some institution or some authority is the cause is not an accurate statement. Of course, I have only two modes in mind here: low and persistent inflation and high and unstable inflation.


Iranís economy has inherently high inflation. Individuals, institutions, laws and regulations, etc. are arranged in such a way that there is high inflation in our economy.


If people other than these officials were in charge we would not experience low and stable inflation. Even in the early 2000s, we did not experience such inflation that prices did not change much consistently. Inflation was relatively low but not sustainable. So our lack of low and persistent inflation has nothing to do with Trump or anyone or anything. Of course, you might say that we divide the same situation of high and unstable inflation into several situations. For example, conclude that the current situation is much worse than ever. This is because there are bigger shocks. That is, the problem of shock has always existed. Note that here we encounter a problem in terms of quantitative analysis. Because we have not experienced such a situation in the Iranian economy in the past, we cannot rely on data much. The data of other countries is useful, but the generalization of their results to our economy is controversial. So I do not have an exact answer to your question. The growth of the monetary base can be itself the result of rising prices, not necessarily the cause. In the scenarios I had, when we controlled different factors, the prices in the scenarios where the growth of the monetary base was high were not much different from the other scenarios. Of course, I do not want to refer to these results, but I just want to emphasize that the relationship is not as transparent as it is sometimes said. Of course, I say from the point of view of a coherent study, otherwise there are numerous points of view. 

What is the right way to deal with foreign exchange market developments?

At least one thing needs to happen to make people believe that the strategy of the establishment is not cutting off from the whole world and get into economic isolation. This means that our ideals and goals have an economic price and are not infinite.

In the current situation, stray money is a lot. Inflation expectations are high and demand for durable goods, gold and foreign currencies is high. Note that this is also out of the question of economics. If such a signal does not occur, at least I do not accept that the situation of countries like Venezuela or even North Korea in terms of sovereignty valuation is a bad situation. This suspicion is reinforced especially when we look at the constitution. You start from the beginning, see how many sentences you need to read to discuss economic welfare.

In short, peopleís trust in the national currency is not maintained by security and judicial measures, and a real event is needed. Now, given the circumstances in the United States, of course, this signal does not have to be directly related to that particular country. Apart from this general discussion, there is another discussion.

The division of imports into basic and non-basic and the allocation of foreign currency on this basis have two problems. One is the issue of corruption. One is the issue of inefficient resource allocation. Once corruption becomes your red line or allocation efficiency is important to you, you put these groupings aside.

For example, you state that the government is not going to control the price of essential items such as bread by allocating forex. Instead, the resources that are released are paid directly and purposefully to the various income deciles. If corruption is a red line, there is no other choice. Experience has shown that the existing regulatory system is not efficient enough to be able to allocate foreign currency without corruption.

At the same time, for operational or other reasons, you consider the level of corruption acceptable. Or you agree to be part of the fuel resources. That is the same efficiency loss that I mentioned. I am not in a position to determine, for example, that corruption should be the red line. But if the government sees corruption as a red line or cares about allocation efficiency, it must pursue distributional goals through other means and methods.

In general, in the current situation, stray money is high and inflation expectations are high too. The foreign exchange market is not separate from other markets and sectors. You have to have a general balance look. Of course, I do not have access to a valid general equilibrium model for the current situation, but contractionary policy is probably a necessity of any proposal.

On the other hand, the government must pursue a clear communication policy. This complement is what I said at the beginning. Reports based on this should describe the governmentís debt trajectory, its policies to reduce the budget deficit, whether in terms of spending expenditures, or in terms of issuing bonds and tax revenues, as well as the governmentís plan to reduce its dependence on the CBI resources and asset sales. 

In order to make its revenue path transparent, it even has to articulate its foreign policy agenda. For example, say that it is not just waiting for the election results of a certain country or it is ready for different scenarios and has a forecast of a certain amount of foreign exchange income. In short, there is a lot of uncertainty about the future right now, and all the governmentís efforts should be to light up this dark future.

If it sees a potential for preserving the value of the national currency, it should make people believe that such potentials exist and are realized in some way. In short, it should put aside the current crooked situation and be transparent and honest, both with itself and with the people. 

Where was the fault in the CBIís foreign exchange policies that led to the USDís breakout?

Given the arguments I have made, I do not think the issue is relevant to the CBI. It is not even a matter of the executive branch. If there was a mistake, the whole system shares in these results. Of course, I do not think it is right to use the word fault. Finally, the strategy of the system is based on this. Whether there was a better strategy and was not pursued is another matter. In this strategy that was chosen, the discussion of economic resistance was central. I think this debate has been going on since 1389 (2010), that is, ten years ago. We know it was not successful. Without the necessary resistance, it encountered a large external shock. The shock was greater than the CBIís expert and managerial capacity. Of course, I now have in mind the CBI in the previous period. For example, in winter 1396 (2017-18) I remember the efforts of my friends at the CBI who sought to stabilize the exchange rate or they tried to justify the rest of the policies, from which many resources were initially auctioned off, in vain and without study support.

 

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  November 2020
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