Is Rouhani Repeating Ahmadinejad’s Tricks in Currency Market?

Economists Farshad Momeni, Mohammad Gholi Yousefi and Jamshid Pajouian are all of the opinion that the CBI could indeed be behind the latest dip in the rial’s value in the weeks running to Dec. 27. Yet Yousefi expressed sympathy with the regulator, arguing that the government has no other alternative to cover its budget deficit. In his view, the administration either has to impose heavy taxes on agriculture and manufacturing or resort to having the CBI sell foreign currency at higher rates.

Use of arbitrage between the official and open market exchange rates as a tool to curb budget deficits is not unprecedented in Iran. “Previous governments also used the same method,” Tasnim Dana news website quoted Pajouian, a professor of economics at Allameh Tabatabai University, as saying in August 2015.

The process is usually such that in case the government faces a budget deficit, the CBI will let the rial depreciate on the open market and then proceed to sell foreign currency at the higher rate. After a while, the CBI will step in to end the fluctuations, thus slightly strengthening the rial. Many economists and pundits share Pajouian’s suspicion, but it should also be considered that the Central Bank faces financial constraints.

The remaining US sanctions are still inflicting pain on the Iranian banking system by slowing down money transfers. Therefore, the supply side of the market can sometimes stall while demand is increasing. In such a scenario, the worry that the rial could depreciate will induce investors to buy hard currency for investment purposes, a process that will lead to an actual fall in the rial’s value, argued Ahmad Hatami Yazd, a senior banking expert and former CEO of Bank Saderat, in an article in Hamshahri newspaper on Dec. 27.

Hatami Yazd believes that the comments recently made by monetary officials that every tool will be used to strengthen the rial are a “political maneuver” to calm down the volatile market. He further predicted that the rial’s value is unlikely to experience a sharp boost by the end of the current Iranian year.

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