The exchange rate as a crucial item in proposed budget for coming year has been anticipated by some analyst around 3000 Rials. Declining oil prices, obstacles about sanctions, controlling imports are the key factors in setting a proper exchange rate.
The exchange rate is among the most challenging topics of the budget which is proposed by government every year. The rate should be approved by Parliament in January. The official rate is currently about 30,100 Rials, although the free market rate is around 36,500 Rials at the moment.
Global crude oil prices have declined sharply since 2014 and are expected to remain low for a considerable period of time which put pressure on the country’s finances like the other oil producing and exporting nations. Considering the oil price, it is reasonable that the exchange rate is set in higher level than the past years.
But the government is struggling coincidently with complicated problems such as inflation, proper growth rate in domestic market and of course all these matters are affected by exchange rate.
Although the government can control exchange rate by manipulating the supply in the market but it has also some consequences as well. In short-term inflation benefits from reducing exchange rate, while in the long run, it will lead to increased import of consumer goods and as a result lower demand for domestic products. This strategy will lead to a plunge in domestic output. On the other hand, raising exchange rate have certain short term negative effects including higher inflation, but in the long run will result in increased and sustainable production.
A sudden rise in the value of the national currency only indicates that the government has pumped oil revenues into the economy to achieve transitory positive outcomes. Such instances can be identified in the past four decades. Unless, the tradable sector’s productivity and non-oil exports do not go up, shoring up the national currency will impede economic growth. To overcome past obstacles, the government has to weaken currency in the long run, although it should be careful creating a severe and sudden shock in the market.
According to officials the budget for the year starting on March 21 has been tentatively set at 2.670 trillion Rials, down from an original plan for this year of 2.740 trillion Rials, not including state-owned enterprises. The government has been trying to reduce the percentage of budget dependency to oil in recent years and they want to substitute tax revenue with it and this can be seen as an advantage. Because the revenue earned by oil can be used in infrastructure and other essential needs of the country.
Some economists believe that the government should have set the rate above 30,000 Rials in order to reach gradually above 40,000 Rials by the next fiscal year. It is believed that the government tries to avoid a sudden rise in inflation by cutting next year’s budget. According to statistics, the inflation rate is expected to fall below 10% in the coming year and economic growth will reach 5%. Inflation is currently about 13%.