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9th parliamentary term to support CBI’s new currency package: accelerating the launch of digital currencies

Soraya Nildarar
Written by Soraya Nildarar

Chairman of the Iranian parliament’s economic commission clarified 12 parliamentary requirements for confirming and supporting the new central bank’s currency policy package. He also warned the government that minor and incomplete changes to currency policies would not be accepted. One of these conditions is speeding up the regulation of digital currencies, Mehr news agency reported.

According to Mehr news agency; considering the conditions of the Islamic Consultative Assembly, Mohammad Reza Pourebrahimi has stated:

Foreign currency market must be managed based on a framework that helps the government satisfy the necessary currency demands for supplying basic goods in the country, as well as the remaining demands in various sectors: including general expenses, items or materials for the production units that sustain the process of economic operations in the country.

He added:

The currency policy, which determined a fixed and constant rate for currencies in Iran’s economy, has been criticized seriously from the beginning and is still being criticized. As a result of this policy, import rate has overgrown while the exports’ section is not in action. This has negatively affected the flow of foreign currency into the country and has increased the exchange rates.

He also said that the Economic Committee has been conferring with the government for several months to prepare a package for managing the currency market, and added:

The government has unfortunately continued an illogical policy in the foreign currency market, despite numerous meetings being held at the Economic Commission (with the participation of Finance Minister and the president of the central bank), or the non-public meetings of the Parliament (with the participation of economic officials).

Pourebrahimi, who is also a member of the Supreme Council of the powers’ Coordination, continued:

Over the last couple of weeks —especially after a new governor was appointed for the central bank of Iran— new directions have been proposed by the government to manage the currency market. It has also been announced that the government is keen to alter its foreign exchange policy.

Minor changes to the currency policy are not approved by the parliament.

“At the beginning of this year, the economic committee presented a double-urgency plan to regulate the currency market. The plan was agreed upon by the Central Bank’s president and the Finance minister. However, the government made another policy to control the foreign currency market afterward.”, Pourebrahimi said.

If the important factors of the parliamentary emergency plan and the repeatedly mentioned points in joint meetings are included in government’s proposed currency policy package, the parliament and the economic commission will surely support it. Otherwise, minor changes and absence of a specialized approach in the package will neither be approved by the parliament nor the economic commission.

First condition

The parliament considers separation of the primary market from the secondary market to confirm the government’s currency policy package.

Pourebrahimi stated:

The parliament has specified a set of conditions for confirming the government’s policy package, first of which is to separate the primary market from the secondary market. The primary market is developed for allocating foreign currency to basic commodities at a preferential rate connected with the government’s revenue from the sale of oil. This market will provide the needed currency for supplying general goods, medication, pharmaceutical materials, agricultural inputs, animal husbandry inputs, and the like.

Therefore, the primary market from our point of view is a market in which the demand for foreign currency to import basic goods is supplied. The government provides the needed currency through this market from the sale of oil, and at a preferential rate of 42000 Rials.

Under the condition for allocating the preferential exchange rate to commodities, the government needs to monitor and control the market in a way that the final consumer buys the goods at the preferential exchange rate, not at the free market’s price. Under the condition for allocating preferential exchange rate to the primary market, the government needs to supervise the price of basic commodities in the final sale of goods.

The secondary market is a market that supplies the demand for currency and conventionally consumed goods, which the bulk of them are related to raw materials for the manufacturing units in the country. The secondary market does not therefore supply the demand for Importing prohibited goods, including 1390 items.

He continued:

The articles which are disclosed to an import ban, consist of two groups: goods which are produced in the country and do not require imports, goods that are unnecessary, luxury and upmarket.

The currency needed for foreign tourism should be supplied from the secondary market.

Pourebrahimi pointed out that the foreign currency needed for foreign tourism should be supplied from the secondary market:

Tourism should also be placed in the secondary market, not including travel currency for patients, student scholarship currency, and so on. The exceptions also need to be determined.

Pourebrahimi said that the expected demand of currency from the secondary market is 35 billion dollars. This demand should be provided by the total non-oil export earnings of the country.

Second condition

Determining the exchange rate, the supply of petrochemicals, steel, and refineries based on the open market mechanism in the secondary market.

He said that the total non-oil exports in Iran are about 440 billion Rials per year:

Therefore, our non-oil exports are higher than our foreign currency needs in the secondary market.

The currency price in this market follows an agreed rate, which is determined based on supply and demand, and the market’s mechanism. It is necessary for all the companies that bring their export currency into this market —including petrochemicals, iron ore, steel and other export items— to determine their material rates, such as iron ore, gas, and so forth in proportion to the new price of the secondary market, since they offer export currency at free market rates. This can contribute to the government’s revenue.

Third condition

In the new foreign currency policy, exchanges should be the main focus of foreign exchange operations in the country.

Pourebrahimi called organization of exchanges the third condition for approving the government’s currency package:

Exchanges which have been trying to pave their way in transferring funds for a long time should become the main focus of the country’s foreign exchange operations in the new currency policy.

He emphasized:

It is important to organize private-sector exchanges, along with the use of exchange potentials in banks and public institutions. Private-sector alignment is more important than public exchanges, as private exchanges can handle currency transfers more easily.

Fourth condition

The government should provide the secondary market with the surplus required currency, to facilitate the import process for basic goods.

Pourebrahimi stated:

The government should supply the secondary market with the surplus currency it earns from the sale of oil, which the secondary market will allocate to the import of basic goods at a preferred price.

He explained:

Some economists believe that the government needs about 10 billion dollars for importing basic goods, while others believe that it needs 14-15 billion dollars to import essential goods.  During the past years, our government has imported 18 billion dollars in commodity. Given the growth rate, it needs 20 billion dollars to import essential goods this year; only if basic goods are offered to the final consumer at the determined (42000 Rials) dollar price, and the market stays empty of economic surplus and brokerage.

Explaining oil revenues, Pourebrahimi said:

The government normally sells about 50-55 billion dollars of oil a year, the price per barrel in this quarter was more than 65 dollars. We forecast that sanctions will have the total oil revenue in Iran decreased by nearly 15 to 20 percent. Our most pessimistic prediction is that a 55-billion-dollar oil revenue would decline to 40 billion dollars, or 35 billion dollars. If the government allocates 15 to 20 billion dollars of revenue to importing basic goods, it will still have 15 billion dollars in surplus oil, which can be presented to the secondary market by the end of the year.

If the government faces difficulties accessing the resources or the funds transferred to the country, the secondary market may naturally use futures securities and transfer its resources to the country with delayed methods that it knows itself.

He referred to the continued cooperation of Russia, China and India to buy and sell Iranian oil and said:

There is a difference between the new round of sanctions and former sanctions: the EU, and the UN had also banned us, during the presidency of Mahmoud Ahmadinejad. While In the new round, no sanctions on the part of the United Nations or the European Union are imposed against Iran. Therefore, there is a possibility that we can arrange our oil sale better than the past.

Fifth condition

Secondary market management through open market operations and by the central bank.

“The surplus currency resources from the import of basic commodities should be brought into the secondary market in which the government should play a role. The central bank should also intervene in the foreign currency market through open market operations. The presence of the central bank in the open market operations is essential for the secondary market. The central bank must take action on secondary market management through open market operations.”, Pourebrahimi stated.

Sixth Condition

Currency Deposits offered to People on a guarantee from the central bank.

“A large part of the currency resource is in hands of the people, physically kept out of the banking network, the exchanges, and the like. This part needs management, too. The central bank had previously allowed banks to open a currency deposit account; the banks opened currency deposit accounts during Mr. Ahmadinejad’s (1390-91) presidential period and the people deposited their currencies into the banks. When the depositors decided to draw their money out, the banks rejected their request and offered them Rials at a public rate: (Sorry, we are out of foreign currencies.)  This was certainly a kind of fraud and a betrayal of trust that caused disbelief and mistrust among people.”, Pourebrahimi said.

He pointed at the double-urgency plan for regulating the currency market, saying the economic committee has clarified that it does not accept the previous method. The central bank needs to officially announce that it accepts all types of currency items in form of long-term/ medium-term/ short-term deposits, and provides a deposit interest rate for them. In other words, the central bank guarantees the standard foreign currency deposits and their interest on day rates.

He continued:

This way, Melli Bank or any other financial institution that the Central Bank acknowledges as a “bank”, can provide people with a deposit account and save currencies —which belong to the people, and not itself— on the guarantee of the central bank. The interest rate for savings is also defined by the central bank: This process ensures that the deposited currency is not backed by Melli Bank (for instance). It also provides the central bank with foreign exchange reserves.

He added:

In a government-issued circular letter, the banks have been addressed to open currency deposit accounts on their own guarantee. If people have lost faith in the banks for they have failed to accomplish their assurances in the past, then the central bank must take action to assemble currency from the community.

Seventh condition

Liquidity management

One of the main provisions is managing liquidity, Pourebrahimi stated.

Eighth condition

Using the capacity of currency agreements —in operational form and not slogan form— to help economic relations.

“The government should use currency agreements. It is important to operationalize such agreements with the countries that are in priority for our economic exchanges. The government has been bound to execute currency agreements by the sixth plan; however, implementation of this pact is taking place slowly. We expect from the new president of the central bank to appoint a specialized team on this issue. We also expect the capacities of currency agreements to be used through the Ministry of foreign affairs and the ambassadors, negotiating in target countries.”

“It is not needed to have a currency agreement with all of the countries in the world, 3 or 4 countries will suffice: Russia, China, and India are our main priority in making currency agreements.”

Ninth condition

Drafting regulations for the possibility of creating digital currencies.

Pourebrahimi stressed on the urgency of accelerating the launch of digital currencies and said:

In order to eliminate dollar’s dominance over Iran’s economy and to separate the country from the negative effect of sanctions, the central bank must act as quickly as possible to provide the required regulations for producing digital currencies. This will enable the private sector to transact through the crypto market.

Tenth condition

Presenting the central bank’s proposed package to reform the banking system’s balance sheet structure, and to prevent liquidity growth.

The organization of the country’s banking system should be implemented simultaneously with foreign exchange policies, Pourebrahimi stated.

One of our conditions for accepting and supporting the government’s currency policies is that the central bank presents its comprehensive plan for organizing the banking system.

Restructuring of the banking system’s balance sheet has been challenged for various reasons. Due to the poor state of the balance sheets’ approaches in banks, the government should offer its proposed package more quickly. The statements of financial position are facing difficulties; Banks try to walk through these difficulties, but they carry out actions that make the economy more troubled: They add to the inflammation caused by liquidity growth. The Parliament and the Economic Commission have been working on the reforming package for the banking system and its balancing sheets for a period of six months. We will be presenting this package to the government in the following weeks.

Eleventh condition

Organizing the ownership of banks and credit institutions.

Pourebrahimi added, emphasizing the need for immediate organization of ownership in banks and credit institutions:

The ownership structure of the banks and financial institutions needs to be swiftly improved in all possible ways, including bank mergers, dissolving bankrupt banks, merging small and inefficient banks, settlements, and the like.

He continued:

The ownership determination task should be rapidly fulfilled, in order to end the disturbance in the institutions and banks.

Twelfth condition

making instant decisions about the assets that unauthorized institutions hold.

Pourebrahimi emphasized on making prompt decisions about the unauthorized financial institution assets, which have been settled through the central bank’s Line of credit. He also mentioned the Supreme Council of Coordination has approved that these assets should be transferred to the central bank as soon as possible; the central bank will also promptly offer these assets to the market, and this will partly solve the liquidity issue in the society.

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Soraya Nildarar

Soraya Nildarar

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