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
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
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
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.