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January 2019, No. 90


Banking

 

Dr. Tahmasb Mazaheri,
Former governor of CBI

Dr. Abdolnaser Hemmati,
Governor of CBI

CBI Governor Must Have the Courage
to Say “No” to the Government


Recognition of the secondary market was a reality that could reduce the commotion and bring tranquility back to the market in compliance with the politico-economic situation.


When Abdolnaser Hemmati was appointed the Governor of the Central Bank of Iran, the foreign exchange market was very chaotic; if the government and the CBI still insisted on continuing the wrong policy of the past and refused to recognize the secondary market, or better be described as the open market, perhaps in the first few days of his work at the CBI, the price of the USD would reach over 190,000 rials (for one USD). However, the government concluded that its previous policies had been wrong and conceded the secondary market.

I have said earlier and reiterate that it is wrong to think that the CBI has created the secondary foreign exchange market because this market already existed and the only thing the government and the CBI did was to recognize it. On April 10, unfortunately, the government and the CBI made a big blunder by setting the price of 42,000 rials per USD. Through their inexpert and wrong decision, the government and the CBI in fact overlooked the real and determining market. As a result of this huge error, tens of billions of dollars in reserves were auctioned and this exacerbated confusion in the open market. After a while, the government and the CBI realized their mistake and released the foreign currency trades in an appropriate action.

I pointed out that in the first few days of Mr. Hemmati in office the market experienced calm and the rising price of foreign exchange was somewhat checked. But it did not last long that the CBI under Mr. Hemmati was afflicted with the same plague as did his predecessor Mr. Seif’.

Mr. Hemmati, like Mr. Seif, seems to have followed the wrong, inexpert and taste-based orders of the government and the CBI. I think at first, Mr. Hemmati, as the new CBI chief, felt that under the current situation he had no choice but to say “yes” to the instructions of the government. The CBI governor should have the courage to say “no” to the government. However, it depends on the people’s morale. If I were the CBI chief I would definitely stand against the government’s wrong and inexpert instructions. It seems that despite changes in management the policies of the CBI remain unchanged.

Recognition of the secondary market was a reality that could reduce the commotion and bring tranquility back to the market in compliance with the politico-economic situation. Meantime, the CBI with the tools in its hands would be able to prevent unusual currency fluctuations. But the reason the secondary market did not succeed goes back to the government’s inexpert interventions. The CBI would need to take two basic steps in relation to the exchange policy so that the secondary market can show its positive effect. First, it should have determined the exchange rate so that it could balance the market in the current economic situation. The rate should be set in a way to support production, cut the incentive for smuggling and encourage exports without the need to supply the foreign currency to maintain the value of assets or speculative products, in which case the market would be in equilibrium.

I dare say finding such a rate is easy, and the CBI deputy governor for economic affairs, whoever he may be, could decide the rate in a blink of an eye! Here, the central point is that the CBI must apply the rate in the market without exposing it. The bank should also be vigilant about the sudden fluctuations in the exchange rate and have a good buffer in this regard. Whenever the exchange rate goes up or goes down sharply, legal action must be taken to check the severe fluctuations.

If you look at the statistics in the first 10 days of the official activity of the secondary market, you will see relative calm and stagnation along with lower prices on the market, but since this decision was not executed properly, its effect was not long lasting, and commotion and rising prices returned to the market. The government did not allow the CBI to set a rate to balance the market. Unfortunately, the rate set was again based on personal taste. The government did not let supply and demand decide the price in the open market.

Unfortunately, the rate set by the CBI turned into a fixed rate with a big difference from the open market. In this situation, the exporters or those who possessed extra foreign currencies for any reason were reluctant to convert their hard currency into local currency at a rate below the open market rates. In other words, the same scenario of 42,000 rials for one USD and its difference with the open market rate, which reached up to 90,000 rials per USD, was repeated at two rates with higher prices. That is, the fixed rate of the dollar was set at 70,000 rials, and the free market rate reached above 160,000 rials. The gap between the secondary market rate and the free market rate, which was going up constantly led exporters and economic activists not to sell their forex on the secondary market, and, on the other hand, ordinary people became currency applicants.

It is natural that in such a situation where the difference between the official rate and the free market is increased, the people get worried about their capital. When people feel the value of their assets is decreasing they would turn them into assets that can maintain their value at any cost. Unfortunately, the foreign currency has now become an asset for maintaining the public’s capital.

Until before the announcement of new policies, unfortunately, the administration and government officials have, for various reasons and with different tastes and incentives placed the CBI in a position in which instead of regulating monetary and forex policies through the expertise and tools available to them, it was turned into an executive body to carry out the decisions of the government.

As long as he was in power as the CBI governor, Mr. Seif complied with government orders although he knew they were expert views. Mr. Hemmati also followed suit even though he had studied economics and has years of experience in various economic sectors of the country.

Fortunately, recently, with the approval of the three powers and the Economic Coordination Council, this shortcoming was removed, and the CBI was given necessary powers to manage the exchange market through its own expert opinion and tools and interfere in the market in accordance with its legal power. My impression is that considering the authority granted to the CBI recently, based on the expert opinion and the balanced rate it has set (it seems that Mr. Hemmati did not repeat the mistake made before by the CBI governor announcing the rates which is the right thing to do) and legal intervention in the market, along with the psychological climate created by the media and cyberspace, it could succeed in bringing the foreign currency rates down in the market.         

 

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