* Authorities propose centralised currency exchange
* New system could resemble managed float of rial
* Government hopes to end influence of speculators
* But unclear if authorities can supply enough dollars
* Unofficial trade might continue at much weaker rate
By Yeganeh Torbati
DUBAI, Sept 12 Iran is hoping that radical
reform of its currency market will help to stabilise the rial,
which has been badly battered by Western economic sanctions,
speculators and inconsistent government policy.
The rial's unofficial rate plunged to record lows around
25,000 to the U.S. dollar this week, less than half its value a
year ago, as Iranians rushed to convert their savings into hard
currencies. They fear the sanctions, imposed over the country's
disputed nuclear programme, will prevent the central bank from
preserving the value of the rial.
To combat the slide, authorities have proposed establishing
a currency exchange that would bring together major traders and
replace the small, scattered money changers which dot Iran's
The new system, if it takes effect, could be tantamount to a
"managed float" of the rial in which the central bank would not
fix the exchange rate but would buy and sell currency in the
market to ensure the rate did not become too volatile.
"What's important is that the price of currency is set in a
transparent market and competitive environment with the supply
and demand approach," Mahmoud Dodangeh, a board member of Iran's
National Development Fund (NDF), was quoted as saying this month
by the Iranian Students' News Agency.
But the proposal has run into heavy criticism from Iran's
private sector. Businessmen argue it would do nothing to solve
the country's underlying economic problems, including
double-digit inflation and near-total exclusion from the
international banking system because of the Western sanctions.
Asadollah Asgaroladi, a wealthy exporter of Iranian
pistachios, dried fruit and caviar, expressed doubts about the
new system at a meeting last week of the Tehran Chamber of
Commerce, and in subsequent media interviews.
The currency exchange "will create a new channel for
corruption", Asgaroladi told Fars news agency. "According to the
information that has come out so far, it seems that most of the
trades in this bourse will be on the part of the government."
The rial currently trades at two key rates: the government's
official "reference" rate, at which only a limited amount of
dollars is available from the central bank, and a much weaker
rate determined by an unofficial market, where the vast majority
of Iranians obtain their foreign currency.
In January the government tried to close the unofficial
market by announcing an 8 percent devaluation of the official
rate to 12,260 and saying it would stamp out black market
But the move backfired by alarming ordinary Iranians and
accelerating their scramble for hard currency, pushing the
unofficial rate even lower. In March, authorities backtracked
and said they would let unofficial trading continue.
The rial's slide threatens to push up inflation and fuel
capital flight from Iran. It has also inflamed political
divisions, with legislative foes of President Mahmoud
Ahmadinejad accusing his administration of foot-dragging and
worsening the crisis.
"If the government had launched the currency exchange last
year through the central bank, we wouldn't be witnessing a
currency shock in the market," Gholamreza Mesbahi-Moghaddam,
head of parliament's planning and budget committee, was quoted
as saying by Fars this week.
Authorities blame much of the rial's weakness on
speculators, and argue the new system would break their hold.
The exchange would be open to "certified" buyers and
sellers, according to government officials quoted in Iranian
media this month. Futures contracts - agreements to trade the
rial at certain prices on future dates - would become available
later on, letting traders lock in prices and ensuring stability.
Ordinary people in need of dollars, such as travellers and
students, would buy hard currency from designated banks at
prices determined by the exchange, Reza Azimi, director for
monetary and fiscal policies at the Ministry of Economics, was
quoted as saying by economic daily Donya-e Eqtesad.
"Currently, market factors do not determine prices," he
said. "A few people inside and outside the country have become
State media said the exchange might be launched at the end
of the current Persian calendar month, or Sept. 21. The scheme
seems to have replaced a previous plan, announced last month by
central bank governor Mahmoud Bahmani, to devalue the official
rate once again.
It remains to be seen, however, whether the government will
go ahead with the plan for the exchange in the face of technical
challenges and scepticism from some in the private sector.
The NDF's Dodangeh said authorities hoped the price of the
rial on the new exchange would settle somewhere between the
current unofficial and official rates.
To ensure stability, he said, the government would provide
the exchange with an initial $5 billion of foreign currencies
drawn from the NDF, a body which invests in infrastructure and
is funded by oil revenues.
But to function effectively, the exchange will need to
persuade the mass of Iranians that it is producing fair rial
rates based on market supply and demand. Otherwise, people will
be reluctant to use the exchange-determined rates and continue
to buy and sell dollars through the black market.
"As long as there are multiple rates for the rial, they
can't establish the bourse" because there will be no confidence
in the values quoted by the exchange, a Tehran money changer
told Reuters by telephone, declining to be named because of the
political sensitivity of the issue.
Some Iranian businessmen argue the proposed exchange would
merely create a third rate alongside the official and unofficial
rates, Donya-e Eqtesad reported. These businessmen speculated
the unofficial rate might drop to 30,000.
Another big question is whether the supply of dollars in
sanctions-hit Iran would in the long term be large enough to
meet demand at the rates determined by the exchange.
At the end of last year, Iran had $106 billion of official
foreign reserves, enough to cover an ample 13 months of imports
of goods and services in normal times, according to the
International Monetary Fund.
But those reserves may now have started falling as the
economic sanctions hurt Iran's ability to export oil and make
financing its other foreign trade more costly. Analysts estimate
Iran's oil exports may have dropped by about 1 million barrels
per day from roughly 2.3 million bpd last year.
Nader Habibi, an economist at the Crown Center for Middle
East Studies at Brandeis University in the United States,
estimated the government now had about $50 billion to $70
billion of hard currency reserves remaining.
Some Iranian members of parliament and importers, including
Mesbahi-Moghaddam, told local media this week that the central
bank had for the last several weeks failed to supply enough
dollars to meet demand. This fuelled market speculation that the
central bank might be cutting back its supply because it was
concerned about a drop in its reserves.
Central bank chief Bahmani, however, insisted the official
exchange rate would remain available for use by importers who
needed dollars to buy essential goods.