August 2011, No. 60

Banking

Fasten Your Seatbelts

When the foreign exchange market was imbalanced we decided to enter needed foreign exchange for that sector at one time instead of introducing four to five billion dollars per month in order to limit the growth of liquidity.

Mahmoud Bahmani, Governor of the Central Bank of Iran

Three days after minister of economic affairs and finance talked about possible omission of three zeros from the unit of the national currency, governor of the Central Bank of Iran announced that four zeros will be omitted and a relevant bill will be submitted to the cabinet in the next six months. At the same time, though some officials claim that the new plan will bolster the national currency, governor of the Central Bank of Iran has noted that omitting zeros will have no effect on inflation and has stated that the measures aims to pave the way for introducing bigger bank bills. Economic experts maintain that the main precondition for omitting zeros, which is usually done after the end of high inflation periods the last example of which was observed in Turkey, is to make sure that inflation has ended. At present, there is no such certainty about the Iranian economy and inflationary pressures due to institutionalization of wrong policymaking methods are high.

Governor of the Central Bank of Iran Mahmoud Bahmani also noted that the current Iranian calendar year (started March 21, 2011) will be more challenging than last year. He added, "We must fasten our seatbelts.... Changes in foreign exchange basket have increased domestic reserves by 10 billion dollars."

Bahmani stated that the new year is complementary to the last year which had been designated as the year of double work and double determination. Referring to changes in foreign exchange reserves, he noted that Iran's foreign exchange needs have been met.

"We have paid more attention to euro and other currencies instead of dollars.... When it was decided to change the composition of the foreign exchange basket, dollars made up 79 percent of the basket, but the situation is different now. We knew that dollar will not gain in international markets. Therefore, it is now traded for 1,110 rials or so. By making that change, we have gained several billions of dollars," he added.

The governor of the Central Bank of Iran stated that decision about omitting zeros from the national currency should be left to the public opinion and if rejected, the plan will be shelved.

He noted that a lot of liquidity flew in the society last year, but the central bank issued 100,000 billion rials worth of bonds which were of great help in collecting liquidity.

The official added that more than half a billion dollars will be injected into the society on weekly basis, saying, "The country's foreign exchange revenues reached 60 billion dollars last year. We had to sell those dollars and credit the resulting revenues to the treasury. When the foreign exchange market was imbalanced we decided to enter needed foreign exchange for that sector at one time instead of introducing four to five billion dollars per month in order to limit the growth of liquidity."

Bahmani noted that growth of liquidity reached about 23.9 percent in early 2010 and was down to 21.6 percent in February 2011. "Of course, it may have exceeded 25 percent in March the same year."

Governor of the Central Bank of Iran also noted that three years ago he was promoted from secretariat of the central bank to governorship. "I predicted current economic situation and I knew that the day will come when we would need the gold. Therefore, we increased our reserves. At that time, 500 tons of gold was sold at 654 dollars per ounce which has increased our reserves by more than 10 billion dollars," he said.

Bahmani noted that 200 bank branches are now selling gold coins and their number will hit 300 soon.

"If the problem in the coin market is not solved, we will increase those branches to 500. We will even let supermarkets and retail stores to sell gold coins in order to prevent the price to rise out of order," he noted.

Governor of the Central Bank of Iran stated that imports to Iran reached about 58-60 billion dollars while non-oil exports were recorded at 25 billion dollars, adding, "Our exports are one-third of imports."

Bahmani stated that if dollar parity increased to 20,000 rials per dollar, market prices will rise 100 percent and people will have many difficulties.

"Therefore, we must think of other ways to solve export problems, including export incentives," he concluded.