Exchange rate is one of the key variables in the economy that affects many sectors of the economy. It plays an important role in determining international competitiveness and any significant change in it could affect the trade balance of the country. There are two general exchange rate system for policy making: Fixed exchange rate system and floating exchange rate system. In Officials Exchange Rate System exchange rate will be kept at a specific level or range, but exchange rate in the floating exchange rate system will be determined based on market supply and demand. Although Iran’s Exchange rate decision makers have always used the fixed exchange rate system, but historically there were two rates: one determined by Central Bank of Iran (CBI Rate) and free market rate. CBI rate announced by the Central Bank of Iran on a daily basis; while the exchange rate in free market is determined by supply and demand mechanism. Exchange rate data (USD/IRR) from 1978 to 2015 has been shown in the table below:
As we can see in the above diagram, Rial against Dollar have declined over the decades, so during 1978 to 2015 Dollar in free market and CBI respectively jumped from 100 to 34,187 and 70 to 29,614 Rial. One of the main reasons for the depreciation of the Rial cited high inflation in the past few decades according to a number of analysts active in this field.
The results from survey during 1978 to 2015 Shows that USD/IRR in free market increased 16.6% and average inflation rate is 18.6 percent. Therefore, USD/IRR`s steady growth was expected during the mentioned period. Although exchange rate determined by CBI, fluctuates less comparing to free market rate, but in 1992, 2002 and 2013 significant jumps have been occurred. Based on historical data, CBI rate jump when in one hand major gap occurs between CBI and free market rate and on the other hand Central Bank of Iran has not enough resources to meet the demand. Decline of global oil price and sanctions on Iran are the main reasons for decreasing Central Bank of Iran`s reserves. During 2003 to 2010 Central Bank of Iran`s aim was to unify exchange rate by supplying foreign currencies to the market. But now after removal of sanctions, more stable economy and also downward trend of inflation, approach of Iran’s decision makers is to unify Exchange Rate.
Based on current condition, CBI rate is increasing with smooth slope in recent years and many economists believed that it will be unified at free market rate. However, we need more evidence to see what do officials think about the desired unified rate considering oil revenue of Iran and other related factors on that.