Sunday, June 26, 2011

Iran’s Ministry of Economy Criticizes Currency Devaluation

The Central Bank’s Devaluation of Rial is Opposed by the Government

Iran’s semi-official news agency Fars today reported that the Ministry of Economy (MoE) had opposed the devaluation of the country’s currency, rial, by the Central Bank of Iran (CBI). Earlier this month, the CBI devaluated the rial by 11% against the dollar. The officials at MoE have told Fars that they were not consulted prior to CBI’s move and are in strong opposition to the radical devaluation of rial in the midst of government’s subsidy reforms program. They told Fars that they were “shocked” by CBI’s unilateral action. This is the first time in recent memory that the officials of MoE have openly criticized CBI’s monetary policies.

CBI defends its action as an effective tool to slow down the rapidly growing volume of foreign imports into the country and as an attempt to bring the country’s official exchange rate close to the market rates, hence preventing the reemergence of a system of multi-layer FX rates, with deficiencies and corruption that such system would create.

The government is seriously concerned of the rising tide of the inflation in the country during the period that the government subsidies are being phased out. The official devaluation of rial would force the importers of raw materials to pass along the added costs to their consumers, pushing the prices higher across the board.


Anonymous said...

Unfortunately, the CBI did not devalue the rial, the market did. The CBI only adjusted their rates to match the market, because Iran decided to give up the nonsensical "one real exchange rate and one fictional CB exchange rate" policy years ago.

Nader Uskowi said...

The CBI did in fact devaluate rial officially, by more than 11%, on 9 June. What you are saying, and correctly so, is the move was forced upon CBI by the market. The rial was loosing its value against dollar in open markets rapidly and CBI had no choice but to devaluate the official rate to prevent the disastrous outcome of multi-layer exchange rates.

In the past couple of weeks, the CBI has been forced to intervene significantly in the market, selling dollars in an attempt to prevent the currency's further slide against the dollar. This latest move runs contrary to its devaluation move earlier this months, and will have a negative and significant impact on the currency hard currency reserves. I believe the CBI is doing this under pressure from the government, and how long can it continue doing it before creating a serious reserve issue is unclear.