Iran`s Financial Status

Posted on Posted in Business Guidelines

Real GDP rebounded strongly over the first half of the year 2016 as sanctions eased post-JCPOA implementation. Oil production and exports rebounded quickly to pre-sanction levels, helping cushion the impact of low global oil prices. Increased activity in agriculture, auto production, trade, and transport services has led to the recovery in growth in the non-oil sector. Real GDP is projected to grow by at least 4.5 percent in 2016/17. The prudent monetary and fiscal policies adopted in recent 3 years, along with favorable international food prices, allowed CPI inflation to decline to a fall of 6.8 percent (y/y, point-to-point) in June 2016. Although point-to-point inflation has risen to 9.5 percent in September, staff estimated inflation is expected to average 9.2 percent in 2016/17.

The proposed Central Bank Bill correctly places price stability as the core objective of monetary policy. However, the proposed governance structure of the CBI is complex and decision making committees are dominated by representatives of other governmental agencies. The central bank will also require instruments such as governmental bonds or central bank paper to intervene and manage liquidity to guide interest rates.

Since late 2012 the gap between the “Reference Exchange Rate” (the one used by the government based on its annual budgets) and the free market exchange rate has widened and in February 2013 reached its maximum of IRR 24,734. In that month, the free market USD/IRR exchange rate also reached its maximum of IRR 36,994 per USD. In mid-July 2013, the reference exchange rate was initialized when the Central Bank started its daily announcements of the interbank exchange rate. Alongside this move, the 2013 presidential election and the victory of President Rouhani calmed down the foreign exchange market and brought back stability to it. The gap between the free market exchange rate and the interbank exchange rate gradually narrowed, and following the approval of the nuclear deal by the US senate in September 2015, the gap reached its minimum of IRR 2,727. The nuclear deal agreement in April provided a good opportunity for the Central Bank to move away from the multiple exchange rate system and move toward a single exchange rate. As a way of influencing the market exchange rate, at times, the Central Bank raised foreign exchange supply through a private bank, creating a massive economic rent that could aggravate exchange rate volatility

An important issue in protecting comparative advantages is to make sure that the national currency is not appreciated in real terms, i.e., that the foreign exchange rates move in parallel with the difference between the domestic and foreign inflation rates. New Economic team has also been emphasizing such a policy from the beginning and statistics indicate that it has been more or less holding. Figure below shows last exchange rates in September 2016.

 

FAR Law Firm

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