Veliollah Seif, the former governor of the Central Bank of Iran, has cautioned that any mistake in managing exchange rate policy during the reconstruction phase could lead to widespread economic disruptions. He pointed out that the Iranian economy requires a serious reevaluation of its exchange rate policies, especially after years of currency fluctuations and reliance on oil revenues.
In an editorial published by the newspaper "Donya-e-Eqtesad," Seif stated that the exchange rate policy will become a vital tool in the post-war phase, directly affecting inflation, foreign trade, and investment. He explained that the traditional options available to policymakers, such as fixing the exchange rate or allowing it to float freely, do not align with Iran's current circumstances.
Details of the Event
Seif considered that fixing the exchange rate is unsustainable due to limited foreign reserves and external shocks. He warned that a full float could lead to sharp fluctuations in the exchange market, necessitating the adoption of a "managed floating exchange rate" system. This system requires determining the currency's price through the market with limited intervention from the central bank to prevent severe disruptions.
Seif emphasized that using the exchange rate as a tool to control inflation is one of the chronic mistakes in the Iranian economy. Although this approach may yield short-term results, it ultimately weakens exports and increases reliance on imports, harming the competitiveness of domestic production.
Background & Context
Iran faces significant economic challenges after years of sanctions and wars. These factors have greatly impacted the stability of the national currency, making exchange rate management critically important. Seif noted that the existence of multiple exchange rates is one of the most prominent obstacles to the efficiency of the Iranian economy, warning that the continuation of this situation could lead to misallocation of resources and increased corruption.
He also called for a gradual and controlled unification of the exchange rate, alongside strengthening support networks for vulnerable groups, to ensure that this measure does not turn into a price shock or a cause of social unrest.
Impact & Consequences
Seif viewed foreign reserves as the "stability shield" in the post-war phase, and they should be used to mitigate sharp fluctuations and ensure the provision of essential goods. He warned that officials' insistence on preventing the currency from rising could deplete these reserves, bringing the country back to previous crises.
Seif also linked the success of any exchange rate system to monetary policy, stressing the need to control the monetary base and use interest rates to manage demand for foreign currency. He highlighted the importance of prioritizing imports, especially for capital and intermediate goods, amid rising demand for foreign currency during the reconstruction phase.
Regional Significance
Iran's experience in managing its exchange rate is particularly significant for Arab countries facing similar economic challenges. The lessons learned from Iranian policies could provide insights on how to deal with economic crises, especially under complex geopolitical conditions.
In conclusion, Seif affirmed that exchange rate policy is not merely a technical tool but represents an anchor for expectations and a compass for resource allocation. The success of this policy could lead to stability and increased investment, while repeating past mistakes could drive the economy towards deeper crises.