Factors influencing hard currency market

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On December 14, 2015, Posted by , In News, With No Comments

Despite the presence of factors governing the forex market that tend to push rates up, there are a number of strong forces emerging to curb further rises in rates.

The English-language paper Iran Daily in an opinion piece published on Sunday examines the factors that affect Iran’s forex market.

The full text follows:

A number of opposing forces are currently influencing Iran’s forex market causing radical changes in rates.

As the Implementation Day (December 22, 2015) of the Joint Comprehensive Plan of Action draws closer, forex rates have gone beyond 36,000 rials in the domestic market, indicating a 10-percent growth compared to the figure on July 14, when Iran and P5+1 signed the nuclear pact.

A glance at the basic factors governing the forex market indicates that currently, four forces are pushing rates up. The first is the continuation of the downward trend in oil prices which has reduced the flow of hard currency to the country. The second is the pressure exerted by Western sanctions which are still in place and have crippled Iran’s international trade and financial exchanges. The third is the pessimism among Iranian businessmen about the full and timely implementation of the JCPOA by both sides. The fourth cause, however, is people’s high purchasing power parity stemming from the gap between domestic and foreign inflation.

The question is whether all these are indicative of the return of instability to the forex market and the increasing likelihood that the upward trend in hard currency rates will continue until mid-March 2016. Of course, the answer is: No, they are not. A number of strong forces are emerging that will curb further rises in rates. Given all the contradictory forces, apparently, achieving stability in the market is the only viable option in the short- and mid-term.

The implementation of the JCPOA is undoubtedly the most important factor in stabilizing the forex market. There are two views on the JCPOA and its enforcement: 1. A number of politicians, economic experts and officials express doubt about the timely and full implementation of the JCPOA and 2. Some experts hold that the JCPOA will not change the country’s economic condition significantly.

Doubts and pessimism about the proper enactment of the JCPOA seem unreasonable. Given the hefty investment by both sides in the nuclear negotiations and efforts to reach the pact; none of them appears willing to procrastinate its implementation. The JCPOA will most probably go into force on time and completely.

Moreover, there is not much difference between the group that underestimates the positive impacts of the sanctions’ removal on the domestic economy and those who played down the importance of embargoes when they were imposed and intensified The reality, nevertheless, is that the removal of the sanctions will play an effective role in reviving Iran’s economy in much the same way their imposition harmed it. It is crystal clear that building is much more difficult than tearing down.

Following the enactment of the JCPOA and the lifting of the embargoes in the second ten days of January 2016, market supply will increase and the flow of revenues into the country will be encouraged through three channels: 1. Iran’s [to be] raised oil output and exports, 2. [To be] unfrozen Iranian assets and reserves — currently blocked in foreign banks, and 3. Improved foreign investments in domestic projects.

Bringing inflation down and reducing people’s purchasing power is another important factor in maintaining the stability in the forex market. Given the decline in Iran’s point-by-point inflation, which is to fall below 10 percent by December 21, the gap between foreign and domestic inflation rates is narrowing and this will significantly reduce people’s purchasing power parity against what it was in the past few years. In case the government manages to sustain a single-digit inflation rate, hopes of a narrower gap between the real and nominal forex rates will be kept alive. This will also help keep the two rates in equilibrium, in lower inflations.

The government’s success in reforming the structure of foreign trade and, thus, keeping non-oil trade deficit at a minimum, will also help restore stability to the forex market. Such a structural reform will give the government more elbow room to manage forex rates by adopting effective policies, despite the drop in oil revenues. Even with lower oil incomes, it will be possible to bring greater stability to forex market if the country’s non-oil exports are increased.

Therefore, following the enactment of the JCPOA and the removal of the sanctions, factors such as increased oil and non-oil exports, the unfreezing of Iranian assets and the enhanced flow of foreign funds to the country will neutralize the impacts of forces which are currently pushing the rates up and thus guarantee the sustainability of imports and stability in the hard currency market in the short- and mid-term. In case the above prediction is realized, the recent rise in forex rates will be an ad-hoc phenomenon. Also, the government will manage to set up a single-exchange rate regime which would keep the dollar rate in the 33,000-35,000-rial range.

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