For advocates of a liberal economy, the weakening of the rial is not seen as a significant issue — as long as it is built on market fundamentals and in line with inflation. Former CBI Governor Tahmasb Mazaheri believes that the monetary regulator must concern itself with currency policies rather than the rial’s parity rates against foreign currencies, as reported by Eghtesad News website Dec. 31.
Indeed, liberal economists and exporters in fact welcome the recent drop in the rial’s value and are encouraging the CBI not to interfere in the market. They believe that local producers will benefit from a currency devaluation as competition between Iranian-made and imported products will increase if the rial’s value is not manipulated.
As seen under previous governments, an artificially strong rial will lead to Dutch Disease, making the output of local exporters less competitive. As such, the administration of President Hassan Rouhani is now being accused by liberal economists of making the same mistakes in the currency market as former populist President Mahmoud Ahmadinejad (2005-2013) once did. The moderate administration and the Central Bank are thus being urged to be brave enough to resolve the issue of instability on the currency market once and for all by letting the rial approach its real value.
Although the ideal would be to have the CBI only manage the seasonal fluctuations of the currency market, it is seemingly not giving up its old habit of constant interference due to political concerns. In the months leading up to the May presidential elections, the rial is thus expected to strengthen — despite all sanctions-related and other financial restrictions the Central Bank already faces.
This policy is likely to be central for the Rouhani administration as the president will need the public to turn up at the polls. But in the medium run, the rules of the rial game must change if local manufacturers and their exports are to come to the rescue of the faltering Iranian economy.