Banking and insuranceEconomical

The battle of the central bank on two fronts to preserve the value of the national currency

What we know as the exchange rate is affected by many components. The main factor is the difference between domestic and foreign inflation, which manifests itself in the price of foreign currencies. When a country’s domestic inflation is high and foreign inflation is low, this difference in inflation manifests itself as an increase in foreign exchange rates. The central factor in high exchange rates and their successive increases in recent decades has been the growing domestic inflation.

On the other hand, there are factors that affect the exchange rate by creating cross-sectional demands. Some of these requests are formal and based on real needs, such as the 25 needs defined by the central bank, which include travel, education, medical, and other currencies. Another part is the demand, which is known in the economic literature as the demand for speculation. Of course, the demand for speculation is not always limited to currency traders, but in an inflationary situation, some people prefer to maintain the value of their assets by buying currency or other assets affected by it.

In recent months, the central bank has developed and implemented programs for both categories of factors affecting the exchange rate, which, despite the pressures from various sides on the foreign exchange market, has been able to prevent sharp and continuous jumps.

Exchange rate stability with reduced inflation

As emphasized, the main driver of exchange rate growth is domestic inflation, which is why the central bank has prepared programs to dry up the roots of inflation, which have been pursued in cooperation with other government agencies. One of the most important goals has been to control liquidity and its components.

On the importance of this issue, Hassan Heidari; Referring to exchange rate control strategies, the university professor told IBNA: “In the long run, there is no way to control the exchange rate unless liquidity is controlled and the root of liquidity control is to eliminate the government budget deficit.”

Heidari added: there are two ways to eliminate the government budget deficit; One way is to eliminate or reduce sanctions restrictions and increase oil sales and compensate for the budget deficit, and the second way is to establish financial discipline and prevent overspending.

Control of monetary variables

Fortunately, good things have happened in recent months in terms of government fiscal discipline and the management of monetary variables to control budget deficits and inflation. Unlike previous years, the 13th government not only did not use the central bank’s salary during the first two months of this year, but also settled the amount of 54,000 billion tomans of the 1400 salary that was spent in the first six months of that year. Also in a notable event, during the first two months of this year, banks’ overdrafts from the central bank were reduced by less than half compared to the previous year, thus limiting another component of the monetary base.

Controlling these two factors of inflation, along with other factors affecting inflation, slowed the growth of variables such as monetary base and liquidity, and even in rare cases, liquidity decreased in the first month of this year. Accordingly, the twelve-month growth of the monetary base in the second half of last year was controlled, despite the twelfth government’s use of the budget, falling from 42.1 percent in August 1400 to 31.4 percent at the end of 1400. The same was true of liquidity growth, with liquidity falling 0.2 percent at the end of April 1401 from the end of 1400.

Strengthen the supply side

Before addressing the demand side, it should be noted that in recent months, the government, in cooperation with the Central Bank, has strengthened the country’s foreign exchange reserves to open the market-making hand to manage future demand. In this regard, last week, the Iranian Minister of Oil announced that with active energy diplomacy and after several months of negotiations, $ 1.6 billion in overdue requests for gas exports to Iraq were received. According to Oji, since the beginning of the year, compared to last year, the country’s gas export volume has increased by 25% and foreign exchange earnings by 90%. The Deputy Foreign Minister for Economic Affairs also announced that most of the blocked money of Iranian businessmen has been paid in Turkmenistan in the past few months. After the gas connection between Iran and Turkmenistan was cut off, the Turkmen blocked the money of Iranian traders due to their demands, which was resolved in the 13th government. Also, in recent months, part of Iran’s blocked resources in the UK, equivalent to about 390 million, have been definitively received, and negotiations are underway with the British to release a figure several times that amount. As a result of these measures, the Governor of the Central Bank recently, referring to the increase in foreign exchange inflows, announced that the country’s foreign exchange banknote reserves are at an unprecedented level.

Respond to micro requests

As mentioned, the fundamental factors affecting the stable control of the exchange rate are on the agenda of the monetary policy maker, however, courageous measures have been taken in the field of demand management.

The first step in launching an online foreign exchange market system to meet the micro-demand of the people was that of Ali Salehabadi; The Governor of the Central Bank promised it in December last year during an intrusive visit to the exchange offices on Ferdowsi Street in Tehran and unveiled it in March. This system was the first step in separating formal and currency demands and speculative demands.

A new wave of demand

But this year, international political developments entered a new phase with events such as sabotage and politicization of the International Atomic Energy Agency on the Iranian nuclear issue and the issuance of a non-constructive resolution against our country and the darkening of the future of Borjam revival talks. The next day, they rode on this wave by creating a media atmosphere.

For this reason, in recent weeks, a wave of demand was formed in the market so that the dollar exchange rate, under the influence of this space, broke the historical ceiling of 32 thousand Tomans and temporarily entered the channel of 33 thousand Tomans.

Central Bank Initiative

Meanwhile, the Council of Chiefs of Staff gave the central bank new powers to play a more powerful role in the market. The first manifestation of this decision was revealed after the meeting of Salehabadi with the money changers in the Central Bank building on Sunday, June 12, and the issuance of licenses for the purchase of exporters’ currencies by the money changers.

The monetary policymaker’s move was welcomed by market participants, and several experts spoke of the important advantage of this decision, which is managing demand formed by making it attractive to sell export currencies without putting pressure on the central bank’s reserves.

The growing impact of complementary policies

The recent authorization of the central bank, along with other parallel policies that had been adopted before, became more effective by creating synergies. Yahya Al-Ishaq; The former head of the Tehran Chamber of Commerce says in this regard: “The Central Bank has provided facilities for the supply of currency; The central bank has told customs that no matter how much they want to enter the country, they should not be hindered, and its origin is not important. “This has made it easier for those who had foreign currency to import their currency into the country, and thus the supply of banknote currency has increased.”

Hamidreza Jihani; “Given the recent law passed by the central bank and customs that any currency declared at customs will not be taxed in the future, this creates a great opportunity for small exporters to Take advantage of a 15 to 20 percent profit margin between the Nima rate and the currency of exchange bills. Accordingly, the liquidity situation for this group of traders will be improved and it will increase the capacity of small and luggage exports and cross-sectional exports, which are done through exporters with low turnover.

The influx of export currencies into the market

The set of measures taken by the Central Bank, especially the recent licenses to exchange offices, has had a good effect, so that according to the Central Bank, in recent days, on average, about 50% of the currencies offered by exporters to exchange offices have not had customers.

Field surveys also show the movement of domestic dollars towards the market and a further decline in the exchange rate. Currently, the dollar rate is in the range of 31,000 tomans, and there is a possibility of further reduction. However, the head of the Money Changers’ Association, pointing out that at present the currency of 31,000 Tomans does not have many customers, says in this regard: Demand determines the price of currency.

Concerns of exchanges

It should be noted that although the action of the Central Bank has transient advantages, but the concerns of market participants should not be ignored. In this regard, the former head of the Money Changers Association, referring to the continuation of the trend of increasing supply against the decline in demand in exchange offices, said: However, following this increase in supply, the average price of the dollar in the last four days of last week, the daily rate decreased by more than 500 tomans. However, it should be noted that in these circumstances, due to the $ 2,000 limit for other topics (buying currency from an exchange with a national card and without travel documents, medical treatment, student, etc.), the outflow of currency in exchange offices is limited. The process needs to be reformed by the policymaker.

According to the activist, if the $ 2,000 ceiling for other topics is raised with consideration, money changers will be able to respond to applicants’ foreign exchange needs quickly. In other words, the exchanges are now ready to supply currency at a considerable level.

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