CBI Says Let the Market Decide Currency Rates
Business And Markets
The post-sanctions economy offers the promise of revitalizing the economy, said Valiollah Seif, governor of the Central Bank of Iran. Tapping into bank loans and the foreign exchange market are at the forefront of measures to lift the economy in the new era, he added, ILNA reported.
“We should let the market decide the real rates and avoid interfering with market mechanisms or rate setting in the forex market,” he said calling for “genuine” foreign exchange rates.
Addressing a meeting of provincial governors late Wednesday, he elaborated on developments related to forex rates and the volatility in the currency market. He was of the opinion that “proper” forex rates are those that encourage manufacturing and exports. “The CBI should function only as the regulator controlling shocks and sharp swings in the forex market.”
Forex rates especially that of the US dollar, have gone through several fluctuations in the past few months. The greenback crossed the psychological barrier of 37,000 among speculations that the CBI was manipulating rates to help plug holes in government budget, a charge dismissed by senior government officials.
After a brief rally on the eve of sanctions relief last weekend, the rial once again lost ground to the US dollar later in the week. The sharp plunge in international oil prices and speculation by currency traders in the parallel-market has put the market on hold. In Thursday trade, the greenback changed hands for 36,330 rials.
Seif claimed that the CBI “has been successful in keeping market volatility in check,” decreasing fluctuations by 30%. He blamed the US dollar’s unexpected rally in recent weeks on some “hidden forces trying to undermine government efforts to balance the market.”
The senior official turned to bank loans noting that bank resources could help lift the economy out of recession if directed toward manufacturing and exports but admitted that the lenders’ resources are limited.
“About 45% of the lenders’ assets are stressed. We should utilize the rest as best as we can if we want to revive the economy.”
The CBI governor announced that the top bank is working to create a mechanism to ease the process of government repaying its huge debts to banks. The mechanism will in turn enable lenders to repay their debts to the CBI through a variety of ways, namely selling assets held by banks in the form of property.
On the sensitive issue of interest rate cuts, he said that it is still a priority for the CBI along with “promoting monetary and banking discipline.” Taking an “active role in the interbank market and reforming the banking sector are among the CBI’s strategies to manage the money market.”
Interest rate cuts rates have been a topic of heated debate among pundits and policymakers in recent months as many believe the present interest rates are too high and discourage production and exports. Banks are allowed to offer deposit rates up to 20% (maximum), while the inflation rate had declined to 12% a giddy 40% in 2003.
Seif reprimanded the former administration for turning a blind eye to the plague of unauthorized lenders and financial institutions, saying that weak supervision is responsible for their unchecked and unwanted expansion. “Some of these institutions have 500 or more branches which makes it very difficult for the CBI to control them.”
The government and CBI are “Trying hard to end the activities of the uncertified lenders once and for all.”
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