No good news for Iran's market

Despite higher interest rates for deposits and a single rate for foreign currencies, Iran's gold coin and foreign currency markets are still chaotic. Experts are convinced that the instability is rooted in Iran's economic issues and the Central Bank of Iran (CBI) can't control the market through circulars and orders.

Fereydoun Khavand, a Paris-based economist and analyst, told a reporter from Trend he believed the dollar costs 18,300 rials today and the CBI's attempt to impose its rate on the market failed because it was unreasonable and unrealistic to set the price for the dollar at 12,260 rials when it was valued at more than 20,000 rials.

On Thursday, 6th of Bahman, (January 26), Mahmoud Bahmani, head of the CBI, announced that starting on Saturday the bank would operate based on a single rate for the dollar. The CBI chief said after calculations by specialists, 12,260 rials would be the equivalent of one dollar.

Over the past month, Iran's gold and foreign currency markets had been chaotic and the rial's value against the dollar had plunged by 50 per cent.

In response to these fluctuations, the CBI announced last week deposit interest rates would go up and a single rate would be set for foreign currency. The bank said currency traders were not allowed to sell money at rates higher than what had been set. These measures brought down the gold coin and dollar prices a little.

According to reports, while the currency bureaus cite the CBI's official rate on its exchange boards, they refuse buying and selling the dollar at the bank-imposed price. Meanwhile, crowds are forming in front of banks selling foreign currency.

The dollar costs 18,200 rials in Iran's free markets at this time.

Mr. Khavand contends that as long as demand for foreign currency is high in Iran's market its price won't drop.

"Demand for foreign currency is relatively high in Iran. Importers, manufacturers, those wishing to leave the country, those traveling abroad for medical treatment and, most of all depositors need dollars and other foreign currency and their rush toward the market drives up currency prices," said Mr. Khavand.

The economic analyst is convinced the CBI doesn't have enough foreign currency and has difficulty supplying the market with the dollar. This prevents it from actually being able to execute its single-rate policy and keeps foreign currency prices high.

Ali Mazrui, a Belgium-based journalist and Iran analyst, agrees that the disarray in

Iran's gold coin and foreign currency market stems from economic problems that are dependent on supply and demand and cannot be controlled by proclamations.

In an interview with Trend, Mr. Mazrui pointed to the government's flawed economic policies as the reason behind higher demand in the foreign currency market, economic insecurity and instability and inflationary expectations, "To maintain their purchasing power, people rush to the market and demand surpasses supply causing prices to go up."

Jamshid Pajooyan, an economic analyst and head of the National Competitiveness Council, agreed in an interview with Trend that edicts can't control the market's instability and prices. But he contends the key issue in Iran's currency market turmoil is an agitation that can't be explained in economic terms.

"There is no problem with foreign exchange revenues or the central bank's balance of foreign currency which means there's no economic justification for the higher prices," said Mr. Pajooyan, "By fuelling rumours and profiting from currency exchange fees, some have created a demand that is anticipatory."

He agreed the government had made some mistakes and said, "Policies to combat higher foreign exchange prices weren't issued in time."

Mr. Pajooyan believes the higher interest rates for deposits can be a factor in stabilising the market, but they will take time.

The CBI's Monetary and Credit Council increased bank deposit interest rates to 21 per cent in early January. Before the Council's announcement, banks' interest rates were 15 per cent for five-year deposits. The Monetary and Credit Council hasn't made a decision yet about short-term deposit's interest rates.

Fereydoun Khavand, economist and economic analyst concurs that the Central Bank's move to increase deposit interest rates came late and won't return the market to its normal conditions.

"Economic experts have said for many years that deposit interest rates in Iran have to be higher than the inflation rate to encourage depositors to save their money in banks. This initiative is a little late because those who deposited their money with banks have seen it lose half of its value in dollar terms. So I don't think depositors would be willing to leave their money with banks again because of higher deposit rates."


/Trend/