Exchange rate policies of Iran has always been a source of debate for policy makers.  As various exchange rate policies can have different implications on trade balance, inflation, employment and economic growth and other key economic variables.

In post-revolutionary economic history of Iran value of Rial vs other currencies has undergone dramatic turbulences. Central bank of Iran (CBI) has tried for many years to put a lid on foreign exchange rates in order to suppress inflation. Inflationary impact of increases in foreign exchange rate cannot be overlooked as Iran is a major importer of raw materials, immediate and consumer goods. However, one of the main driving forces behind soaring inflation in recent years has been changes in the monetary base (which pushed inflation up to as much as 40 percent in 2012). Also this perspective fails to consider the fact that when prices increase, nominal exchange rate, ceteris paribus, will increase nominal exchange rates, while real exchange rate, which is inflation-adjusted remains unchanged.

In order to reduce inflationary impact of foreign exchange rate and to facilitate inflow of necessary goods, CBI for several years utilised a policy of multiple exchange rates. However, adverse impacts of multiple exchange rates including instability in FX market, rent seeking, corruption and waste of resources on bureaucracy involved in processes of CBI-rated foreign exchange allocations to importer of goods with priority, had taken its toll on Iran’s economy.

In post-revolutionary economic history of Iran policy of multiple exchange rates was in place until 2001 during which fixed exchange rates were set by the CBI on a daily basis and free market rates were determined by market mechanism. But from 2001 to 2010, CBI and free market exchange rates were unified into one rate and CBI adopted a managed float regime. In 2010 due to significant difference in market and CBI official exchange rates, as a result of high inflation and liquidity increase, the government decided to bring back a triple exchange rate policy. Which later turned into a dual exchange rate that is still in place.

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Iran as a major exporter of crude oil receives a significant amount of its revenue from oil exports. But oil revenue is never directly injected into the market, i.e. CBI and government bodies can have different policies at different times regarding injection of oil revenues in the FX market. And there has been an ongoing debate among economists as to whether oil revenues should enter the economic cycle and if so to what extent.

Studies show in times of lower oil revenue, CBI and government had less control over FX market, while in times of higher oil revenues there is more room for intervention in the FX market which will disable market mechanism to set the exchange rate.

A study by Dr. Khataie, S.Shahhoseini (2008)[1] shows that increases in oil revenue impacts the economy in similar manner as injecting fresh money from a non-productive source which causes an increase in aggregate demand while the production level remains unchanged, which will eventually increase level of prices. Higher inflation depreciates the currency. While on the other hand more intervention in the FX market and allowing more inflow of oil revenues increases FX supply side and will keep exchange rates low. So higher inflation and lower exchange rate means less competitiveness for domestic products and will leave the door open to more imports. Also currency appreciation will damper non-oil exports. Conclusively injection of higher amounts of oil revenue into the economy will have adverse impact on the trade balance.

Moreover, less dependency on oil revenue will keep FX market less vulnerable to fluctuations in oil prices. So government has taken steps into gradual injection of oil revenues into FX market. As well as the fact that due to sanctions oil revenues of Iran took a downward slope in recent years. So government is accommodated to conditions of lower oil revenues. Besides, government has actively taken steps towards less dependency on oil earnings.

In 2008 oil earnings accounted for about 29.6 percent of Gross Domestic Production, while in 2015 IMF reported a 10 percent share of oil revenues in GDP, citing Iran as the least oil dependent country among 12 oil exporting countries in the MENA region.

Government in order to minimise dependency on oil revenues, has shifted its approach towards more income from taxation. Consequently, in 2015 for the first time in last 50 years Iran’s tax revenues exceeded its oil revenue.

In conclusion, as a step towards more stability and predictability of FX market also in order to reduce adverse impacts of multiple exchange rates, CBI has recently taken steps to facilitate process of unifying the dual exchange rates and adopt a single exchange rate regime.

On 30th July 2016 Central Bank of Iran authorized banks to sell and buy foreign exchange under the free market rates. Before the aforementioned date, banks were only allowed to sell CBI official exchange rate. This step can lead to more stability in the market.

Also a look at the trends shows a gradual convergence of the two rates. As CBI exchange rate is ascending at a higher rate than free market exchange rate. For instance, from April 1st to September 1st 2016 official CBI rate shows a 3.4 percent increase, while free market exchange rate rose 2 percent in the same period.

Adoption of Multiple exchange rates has been a major barrier to foreign investments. As a result, steps towards unifying the exchange rates by providing stability and transparency in the FX market will pave the way for inflow of foreign investment.




[1] Khataei M., Shah Hosseini S., Molana S.H., 2008. The study on the effect of changes of oil revenues on real exchange rate in Iran’s economy