0342 GMT May 20, 2018
In an inflationary economy, such as that of Iran, 'time' plays an indispensable role since a probable rise in free market rates is a daily concern. This would boil down to the government's ultimate failure to revive the single exchange rate against hard currencies.
Efforts to bring rates down steadily have failed to produce favorable results. Nevertheless, a quite logical reasoning is that given the accumulated inflation on the rates, which has not been reduced, the only way to adopt a single-tier system, is to bring about a sharp increase in official forex rates.
Therefore, policymakers are required to first think of measures to minimize the shocking consequences of steep rise in foreign exchange rates prior to addressing concerns over the mode of reviving the single-rate system, i.e. sudden or gradual.
Sooner or later, domestic policymakers will understand the necessity to raise rate all at once.
To implement the single-rate system, policymakers are required to take note of market demand and choose an appropriate time for reviving the system.
High interest rates, which was [and still is] not much favored by Iran's economic policymakers, helped reduce the domestic economy's inflation at a brisk pace. However, it failed to deliver favorable outcomes in forex market. High real interest rates which lead to the accumulation of savings in banks, are the main cause for the reduced demand in the forex market when it displays sign of price hike. This is the sole reason that increased rates has not come as a shock to the market. Policymakers could have adopted the single-tier system using the opportunity provided by high interest rates, particularly, when Iran had reached the historic nuclear accord with the P5+1 and demands for speculation had been reduced to an all-time low. Nonetheless, opportunities were lost one after another because the policymakers had concentrated on reclaiming Iran's frozen assets, rather than stimulating demands.
While the Central Bank of Iran plays an effective role in reviving the single-tier system, in case speculation increases, even CBI's reserves will fail to minimize its dire consequences, as was experienced in 2011 and 2012.
Policies to lower interest rates can lead to a rise in speculation. To increase the flow of foreign funds to the domestic economy, the government is required to raise official hard currency rates and introduce a single exchange rate against hard currencies.