Increase in Dollar Price Amid Expectations of Decrease

The most common expectation from the economic developments following the nuclear agreement was supposed to manifest in the currency market. Prior to the final agreement between Iran and Western powers in July of this year, the currency price had the highest correlation with the developments of those negotiations. Any change at the negotiation table quickly reflected in the Istanbul crossroads, creating an expectation that with the finalization of the nuclear deal, the currency market would soon experience a significant decrease. The market awaited the government's behavior. In the early days following the announcement of the agreement, Hassan Mansour, an economist residing in Britain, conditioned the expectation for price changes in the currency market on other considerations. He predicted that the prices of various currencies would initially decrease due to the agreement between Iran and global powers, but the subsequent trend in the currency market would depend on the government's actions regarding the increased foreign revenues. Mansour emphasized that it was still unclear how and at what pace Iran's blocked revenues would be released and what plans the government had for them. He believed that after establishing a new trend in imports and exports, the dollar price would return and approach the pre-agreement rates. Other analysts also connected the behavior in the currency market to the trend and rhythm of imports and exports in the days and months following the lifting of sanctions. Almost simultaneously with the announcement of the nuclear agreement, which had the most tangible effect of releasing Iran's blocked assets and facilitating the flow of Iran's oil and non-oil revenues into the country, the Central Bank decided to implement a unified exchange rate policy, or more precisely, a managed floating exchange rate system. Valiollah Seif, the head of the Central Bank, had repeatedly emphasized that the bank would implement this policy when market conditions were favorable. He had previously stated that a multi-rate currency system leads to corruption, which is not desirable for the bank, and that the Central Bank aims to unify the currency rate. He announced that the necessary timeframe for unifying the exchange rate in Iran would be five to six months after the implementation of the agreement. According to Seif, during this six-month period, the Central Bank would operationalize a process for connecting Iran's banking system with international banking agents to ensure that after the unification of the exchange rate, the speed of resource movement would be acceptable and not face interruptions and challenges. Unifying the exchange rate has been a policy supported by a significant number of economists, a policy that had been tested during Mohammad Khatami's administration but was set aside during Mahmoud Ahmadinejad's presidency, leading to a period where economic actors even experienced a three-rate currency system. Now, almost two months after those days, while the comprehensive nuclear program or 'JCPOA' was undergoing review by the representatives of the parliament, congress, and senate in Tehran and Washington, prices in Iran's currency market have not only not decreased but have also shown a steady increase. While the dollar price fluctuated around 3300 tomans before the agreement, it dropped to 3200 tomans the day after the announcement of the agreement on July 23, 2015. However, after that, the fluctuation range of the dollar price shifted to higher levels. The gradual increase in the dollar price range in recent days and weeks has accelerated, reaching around 3500 tomans in the free market. At the same time, the price fluctuations in the interbank network for the dollar and other currencies have also increased, rising to about three thousand tomans. Furthermore, examining the changes in the exchange rate of the dollar from 2013 to September 2015 shows that while the average exchange rate of the dollar increased from 2125 tomans in 2013 to 2907 tomans in the first half of 2015, the fluctuation range of the exchange rate also narrowed during this period. But what does this increase mean and where does it stem from? Samad Karimi, the head of the exports department at the Central Bank, linked this increase in currency prices to what he calls 'fundamental market factors.' In a television program, he mentioned 'increased real demand, speculative demand, precautionary demand, asset conversion, and increased volume of forward transactions and fluctuations caused by unofficial market makers' as some of the factors contributing to the increase in currency prices. He also noted that 'the decrease in oil prices, the decline in stock prices, the increase in demand for travel and pilgrimage currencies, dollar cash arbitrage, and the increase in the dirham rate' were among other factors that led to the increase in exchange rates in the market. The head of the exports department at the Central Bank estimated the average value of paper transactions in the currency market at around 200 million dollars per day, stating that although physical cash and dollars are not exchanged in these transactions, they are involved and influential in price increases. However, alongside the factors mentioned by this Central Bank official for the price increases, there is always suspicion regarding the Central Bank and the current government that they may be selling currency at higher prices to cover budget deficits and secure the necessary rial resources. This suspicion is heightened when recalling that the government and Central Bank under Mahmoud Ahmadinejad were seriously accused of implementing this policy. This concern was expressed by Abdolkarim Rajabi, a member of the Islamic Consultative Assembly, who hoped that the current Central Bank and government would not have increased the currency prices with such an intention. However, Ali Tayebnia, the Minister of Economic Affairs and Finance, emphasized in an interview that the government never views currency as a source of income, while also conveying to the currency market that a dollar price of 3500 tomans is not concerning. Mohammad Baqer Nobakht, the head of Iran's Management and Planning Organization, also stated elsewhere that the government and the Central Bank do not believe in intervening in the market. He implicitly referred to the severe price fluctuations during Ahmadinejad's administration, where prices quadrupled in a short period from spring to autumn 2012 after sanctions were imposed and the government's inability to manage the currency market. Samad Karimi also stated that the bank's duty and the institution's desire, according to monetary and banking law, is to stabilize the market. He emphasized that the exchange rate is a key economic variable and must be determined based on fundamental market factors. He stressed that the Central Bank is not attempting to create distortions in the currency market as a monetary authority and supervisor. Among the various reasons for the recent increase in currency prices, another reason should be added to the list: the Central Bank's approach to unauthorized currency dealers and its decision to organize this market has faced resistance from unauthorized dealers and protests from market actors regarding the conditions for obtaining licenses, which may also be one of the reasons for the increase in currency prices. Overall, it is not far-fetched to assume that the government and the Central Bank do not have significant issues with a gradual and slow increase in currency prices, which in the economic discourse of the government is referred to as the realization of prices in this market. According to a recent survey conducted by the newspaper Donya-e-Eqtesad among 26 economists, 38% of participants do not have a problem with the increase in currency prices, and while 62% of these economists support stability in the currency market, there is no support among these 26 economists for a decrease in currency rates.