Is the Moral Discourse of the Central Bank Governor Effective?

Abdolnaser Hemmati, the Governor of the Central Bank of Iran, stated on Saturday, September 1, at the 29th Annual Islamic Banking Conference: "Our policy is to refrain from using Central Bank resources to regulate the currency market; however, we have $40 billion in non-oil exports, and if these resources enter the market, it will undoubtedly regulate the currency market." He simultaneously added, "Foreign reserves are the honor of the Central Bank!!" Following these remarks, the price of currency in the unofficial market in Tehran once again rose, with the price of each US dollar reaching nearly 12,000 tomans on Sunday and surpassing 13,000 tomans on Monday. The policies announced by the Central Bank Governor are not new; they have been implemented to varying degrees in the past and have been forgotten due to their ineffectiveness. However, the important point is that the statements of the Central Bank Governor—especially in the current circumstances—are based on several hidden assumptions and a simultaneous perception of the stability of macroeconomic factors, which is questionable. These assumptions and perceptions are not justifiable in the context of economic crises and sanctions, which are accompanied by severe fluctuations. In the coming months, especially if the second phase of US sanctions is implemented, macroeconomic factors will experience greater instability due to uncertainty. For example, the assumption that Iran's "$40 billion" in non-oil exports will continue in the future is questionable, as a significant portion of non-oil exports consists of petroleum condensates, which could be subject to sanctions. Furthermore, past experiences show that not all revenues from non-oil exports return to the Iranian economy. Given the capital flight from Iran, there is uncertainty about the return of all non-oil export currency to Iran. Even currently, while the sanctions are not yet tightened, some currency and capital either remain outside Iran or flee the environment and end up in other countries. Ultimately, it is not unlikely that with the tightening of sanctions, especially if Iran is placed on the Financial Action Task Force (FATF) blacklist, the process of incoming foreign revenues will be disrupted, shattering the dream of bringing $40 billion in non-oil export currency into the Iranian economy. Another assumption of the Central Bank Governor is that demand in the Iranian currency market will remain at current levels. However, in conditions of sanctions and crisis, it is likely that due to increased public demand in society, capital flight from Iran, and the Central Bank's reluctance to inject currency, demand for currency in the Iranian market may actually increase. What conditions are the new policies of the Central Bank suitable for? The optimistic and new policies of the Central Bank regarding maintaining foreign reserves and relying on foreign revenues from non-oil exports are only effective under certain conditions that do not currently exist. Stability and confidence in foreign policy and macroeconomic levels, economic prosperity, and the opening and expansion of foreign trade are among the most important of these conditions. Additionally, Iran's non-oil export goods must have price and quality advantages. However, non-oil export items such as carpets, dried fruits, and groceries have remained the same for many years, with fewer new and competitive items observed. Moreover, Iran's export markets remain unchanged, such that the basket of export items and the basket of export markets have not undergone fundamental transformations. Therefore, Iranian producers and traders have been unable to diversify their export basket and enhance their competitive power in terms of quality and price. Consequently, given global competition in goods and services markets, maintaining revenues from non-oil exports at current levels is also questionable. Consequences of the Central Bank's New Policies The Central Bank of Iran lacks independence. Therefore, sudden shifts in its policies in the future are not surprising. However, if the Central Bank— as claimed by the Central Bank Governor— refrains from supplying currency to the market, the reduction of government currency supply to the market will increase the prices of internationally recognized currencies in the Iranian currency market, as the establishment of a secondary currency market has not succeeded in reducing currency prices. In the past, the Iranian government artificially kept currency prices and price levels low by injecting currency, rent, and subsidies, but currently, if the policies announced by the Central Bank Governor are implemented, given that the incoming currency from non-oil exports is insufficient to cover all imports and also precautionary or speculative demand in the currency market, the emergence of new inflationary waves in the future will not be surprising. This, of course, will not be the only consequence of such a new policy from the Central Bank. As currency prices rise, followed by the rise in the prices of goods and services, investment and consumption—which are the basis of economic growth—will decline, negatively impacting employment rates. Such a situation implies simultaneous inflation and unemployment, leading to the expansion of public poverty.