Is the Secondary Currency Market Effective?

According to reports from Iranian media, the prices of major international currencies such as the dollar in the 'secondary market' have approached the prices of these currencies in the 'informal currency market', which the government describes as the 'currency smuggling market'. Thus, developments in the currency market have once again shown that the currency market and even other markets, such as the goods and services market, ultimately follow the informal market and do not tolerate directives and orders. The price of the dollar and other major currencies serves as a thermometer or barometer of the economic-political situation in Iran. The depreciation of the rial against these currencies signifies increasing economic pressures and a decline in the credibility of the national currency. Additionally, the inefficacy of the Central Bank's currency policies and those of officials also indicates a reduction in the credibility of management institutions. In this context, the government is trying to manage the currency market in a way that keeps crises hidden. However, the daily experience of the currency market indicates otherwise. Market actors, including traders, consumers, and investors, are sensitive to this and adjust their evaluations and activities regarding the future of the market based on the rates of major international currencies, especially the dollar. For market participants, the free market exchange rate is the benchmark for judgment, not the official dollar rate. The prices of all goods and services are also determined directly or indirectly based on the official free market prices. Unless the government interferes with pricing through laws or by injecting currency or providing subsidies. Following the failure of the government's single currency policy aimed at suppressing the free currency market and setting the rate at 4,200 tomans for each US dollar, the establishment of the NIMA system, which led to fluctuations and increases in the prices of major international currencies against the rial, the establishment of the secondary currency market was put on the agenda by the government and parliament. The implementation of this policy signifies an acceptance of failure in managing the currency market. The secondary currency market is a market, alongside the distribution of government currency or the primary market, that facilitates the exchange of currency at non-government prices. According to government officials, exporters of non-oil goods can exchange the currency obtained from 20% of non-oil exports with importers of goods categorized as third-category goods, meaning consumer goods. Based on this decision, the import of certain goods has been prohibited, but the government is obliged to allocate the 4,200 tomans currency only for essential and vital goods based on oil revenues. With this categorization, the government simultaneously paves the way for rent-seeking. Since financial markets, including the currency, coin, gold, and securities markets, as well as the goods and services market, are intertwined, their separation is practically impossible. Additionally, price formation in all these markets ultimately derives from the informal market rate. By suppressing the informal currency market in Iran, part of this informal market exists abroad, in countries like Dubai, Iraq, and Afghanistan. This part of the informal market plays a decisive role in currency pricing for economic actors. Therefore, it is not surprising if the government’s 4,200 tomans currency emerges through the convoluted bureaucratic pathways and is traded at unofficial prices. Past experiences have shown that artificially separating these markets—namely the primary government currency market and the so-called secondary market—is practically impossible. The market does not accept a vacuum, and the existence of currency rent, which arises from the difference between the government currency rate and the informal rate and the secondary currency market rate, tempts actors to violate regulations and accept the associated risks. This is because the market mechanism has its own specific rules of play and is not subject to the wishes or promises of politicians, ultimately violating the regulations on paper. The experience of the government's failure to control currency prices in past years, as well as the recent convergence of prices in the secondary market to those in the informal currency market, confirms this claim. In this context, the government has attempted to manage the currency market over the past forty years by injecting oil revenue currency into the market, but this has only helped to conceal the crisis, and the government's currency policies have failed. Currently, if the political-economic situation remains stable and no significant changes occur in these areas, Iran's financial markets, especially the currency market, will continue on this path, and the existing rent between the primary and secondary markets will be shifted. However, the current situation is the calm before the storm, as this fall, with the imposition of US sanctions and increasing international tensions with Iran, the rates of international currencies and the prices of precious metals will rise. Thus, with the widening gap between the government currency price and the price in informal currency markets, opportunities for speculation and rent-seeking will increase, and the Iranian currency market will witness more turbulence.