Political and economic reasons of rising exchange rates

Political and economic reasons of rising exchange rates
ID : N-1590 Date : 2018/04/12 - 10:04

(Persia Digest) – The currency market in Iran has faced severe fluctuations over the past months, and especially over the past few days; so much so that it reached the 6000-toman mark, prompting the Iranian government to issue instructions forbidding exchange rates of over tomans 4200. Certain experts and sources close to the government have mentioned non-economic reasons for such a jump in currency rates. Persia Digest reporter has interviewed Professor of Economics at Allameh Tabataba'ei University, Mahdi Pazouki, about his views on the subject.

Dr Mahdi Pazouki, Economist, told Persia Digest: “Currency fluctuations in Iran have two reasons. The financial reason is the volume of liquidity in the Iranian economy, which is tomans 1500TR. This large figure is a potential danger for the economy. Governments must direct this volume of liquidity towards production for economic growth. But, even if 10 percent of this large volume of liquidity enters the market, it will create fluctuations in currency rates due to the atmosphere of distrust and uncertainty.”

He added: “However, this economic reason became actual due to political reasons brought about by the opposition to the government who wish to undermine President Rouhani. As the President reported during the 2018 budget presentation to Parliament, 25 percent of liquidity in the country is in the hands of unlicensed credit companies who can easily upset the forex. The 2015 JCOPA Iran nuclear agreement and its probable decertification by Trump in May and withdrawal by the US has also added fuel to the fire and added to uncertainties. Middlemen and dealers have also taken advantage of the situation.”

Talking about government strategies to control the forex, Pazouki said: “I disagree with price fixing, but consider the government strategy to fix the rate for the dollar at tomans 4200 in the short term. In the light of politics presently dominating economics, the government had no other options but to intervene.”

He continued by saying: “But, in the long term, the government must opt for economic reforms in Iran. The Supreme Audit Court of Iran (SAC), guided by the Supreme Leader and the head of the three branches, CBI Chief, Head of the Management and Planning Organization of Iran, and two economists appointed by the President must convene and act on economic reforms.”

He added: “Iranian economy requires five types of reforms: 1) Subsidies must be rationalized and only paid to the lower three deciles; 2) Energy prices must be corrected and actualized; 3) Economic discipline, including monetary (banking system) and financial (budgetary) disciplines must return to the economy of Iran; 4) Investment security to be preserved for investors from home and abroad; 5) Economic ties to be increased with the world, especially industrialized countries.

The university professor stated: “Although foreign policy is not in the hands of the President, yet it must be conducted according to the Constitution. The JCPOA agreement was reached once it was sent to the Foreign Ministry from the Supreme National Security Council. Today, Mr Rouhani must pursue the policy of interaction with the world, including Europe. He must be aware that the people voted for him in the 2017 elections, because they felt he will interact with the world in our national interests.”

He continued: “The world must also be aware that working with Iran has two main economic advantages – cheap labor and low-cost energy carriers which are both good incentives for foreign investment in Iran.”

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