Why Cheaper Rial could Help Iran

By Navid Kalhor, for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

At present, Iran has both an official exchange rate and an unofficial market rate that is used in exchange houses. The rial trades at above 35,000 per US dollar on the open market, compared to the official rate of around 31,000.

To help boost economic growth, Central Bank of Iran (CBI) Governor Valiollah Seif has announced that he plans to unify the dual currency exchange rates before the end of the current Iranian calendar year (March 20, 2017). If realized, the move will be a major step toward effectively floating the rial and ending state control over the foreign exchange market.

Iran has long been struggling to end the practice of maintaining dual exchange rates, but ending this arrangement is far from easy. Though Seif has on various occasions announced that the unification of foreign exchange rates is just around the corner, it has not materialized due to the myriad challenges.

In a July 23 op-ed for the leading economic daily Donya-e-Eqtesad, economist Ahmad Mojtahed outlined several factors that have prevented the CBI from unifying exchange rates so far. In Mojtahed’s view, “stabilizing the inflation rate below 10%, reducing currency rate volatility and recent permission for banks to buy and sell hard currencies” are positive and necessary steps taken by the CBI, but they are far from sufficient.

He argued that factors such as continued lack of access to international financing as well as Iran’s own foreign exchange reserves, concerns over the return of high inflation after its successful reduction in past years and the upcoming presidential elections in the United States and Iran, coupled with the possible impact of the ongoing economic recession, are all fundamental challenges delaying the establishment of a unified exchange rate.

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