An Estimate for the Real Foreign Exchange Rate in Iran

An examination and close observation of currency exchange fluctuations in Iran reveals that over the years, problems and crises have occurred in connection with the exchange rate, which have brought about complications in the country’s currency exchange market and hence the economy. Such problems and crises continue to exist today. The developments of the currency exchange crisis during the last few months provide clear proof for such contention. Up until the late 90's, currency exchange restrictions and deficits in the balance of payments mainly due to low oil prices laid the ground for surges in foreign exchange rates in the free market. In the year 2000, owing to the improved situation of the foreign exchange market as a result of economic stability due increases in oil prices, the unified exchange rate policy was re-implemented after many years of a multi-rate regime. Over the past decade until Spring 2011, Iran’s Central Bank, which channels more than 90 percent of hard currency into the local market, had employed a “managed float system” to support a single rate against hard currencies, whereby the Central Bank managed the market and pegged the rates to the target rates by relying upon its foreign currency reserves and buying and selling foreign currency in the free market. In the 2000's, after the adoption of this policy, the official exchange rates (the foreign currency sold by the government in the interbank market) and the free market rates (e.g. at currency exchanges) were unified in practice and the slight difference between these two rates reflected the profit margin for the traders of foreign currencies in the free market. Around mid-March 2011, however, due to the pressures caused by rising inflationary expectations created by considerable surges in the amount of liquidity, the targeted subsidy plan and growing international pressures on Iran because of its nuclear program, the tendency to arbitrage in the foreign currency market escalated and for the first time in 10 years, it led to a ...