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Prevention is Better than Treatment |
The first responsibility of the Central Bank is to
guarantee safety of the monetary and currency system.
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A decade after unification of the exchange rate and elimination of numerous
complications caused by the multiple foreign exchange rates, once again the
same dreadful nightmare has surfaced.
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Dr. Mousa Ghaninejad, Senior Economist |
In recent weeks, the volatile foreign exchange market showed that the
dangerous trend initiated some time ago has borne fruit and another
extensive tablecloth has been spread for rent-seeking and waste of resources
thanks to the imprudence of relevant authorities.
Explanations and justifications by monetary officials with regard to return
to the multiple rate policy is indefensible in scientific terms and
unacceptable in terms of policy making. Economic knowledge on the one hand
and historical experience of all countries, including Iran, in 1980s and
1990s on the other hand, show that through multiple rate and administrative
allocation of foreign exchange not only no optimum benefit would be taken
from exchange resources, but such a policy would cause waste of resources
and promote rent-seeking and corruption.
Under conditions that the Iranian economy has been placed under the pressure
of a big shock as a result of the huge embezzlement in the banking system,
opening of another door to rent-seeking and corruption of the new type is
deeply regrettable and at the same time surprising.
Common sense says that prevention is always better than treatment. The first
responsibility of the Central Bank is to guarantee safety of the monetary
and currency system. Multiple rate of foreign exchange which has no other
meaning than injecting a virus of corruption into the national economy,
contradicts this prime responsibility. Monetary officials are right when
they say that parts of the pressure exerted on currency market which has
caused a sharp rise in its rate, is due to capital speculation, smuggling
and capital flow; however they forget that such a demand has its roots in
incorrect monetary and currency policies.
In circumstances under which the inflation rate is higher than the interest
rate of bank deposits and as a result cash asset owners are witnessing
devaluation of their cash wealth, it is just logical for them to quit the
money market and select a substitute alternative. Purchase of currencies in
whose economies the inflation rate is somehow lower, is a reasonable choice
for protecting the value of the assets and should not be blamed. As a matter
of fact, those should be blamed who shoulder the responsibility of checking
the inflation and protection of real value of national currency. The choice
is that monetary policy makers, instead of accepting the responsibility of
the repeated mistakes they have made, address and blame victims of these
policies as speculators and those providing for the flow of capital.
It should be noted that in the early days of the 1990s when private banks
started operation and were given a free hand in setting banking rates, the
cash assets of the people were increasingly directed towards these banks. It
even attracted cash deposits from outside the country. Unfortunately, from
the second half of the 1990s, private banks were gradually deprived of their
freedom of action and were inevitably forced to follow administrative
instructions of the Central Bank and lost the meagre operational initiative
they practised in the market. But, the rising demand for smuggling
commodities also is deeply rooted in the wrong monetary and currency
policies.
The high domestic inflation in comparison with the present inflation in
countries which are Iran's trade partners, together with fixing the official
exchange rate, will make imported goods cheaper and exported goods more
expensive; as a result the demand for the currency required to smuggle goods
will increase day by day. Multiple exchange rates more than blocking the way
to the smugglers, would present them a new case for smuggling. Through
administrative decisions and government instructions economic problems could
not be fought off.
Economic problems could be settled only through economic solutions. The
disturbed and agitating condition of the monetary and currency market in the
country is an indication of the impasse in the wrong instructional policies
which are alien to the teachings of economics and even the common sense. To
test the tested is wrong. Insisting on continuation of current crooked ways
of monetary and currency policies would have no result but further
aggravation of the problems and its change into a great crisis in future.
In the same way that in a not too distant past, we were witness to the
outcome of sticking to the policies on stabilization of energy carriers
prices, in order to get out of the present condition, reform of policies is
an immediate and inevitable necessity and any delay in this regard would
result in exponentially heavier costs.
It seems that the best mechanism here is unification of foreign currency at
a level which could be enforced and supported under the status quo and
simultaneously let the banking system decide the deposit rates in order to
ease up the pressure of liquidity on the demand for foreign exchange.
Obviously, this first step for reform would become fully successful when
inflation is rooted out. The two-digit and chronic inflation in our economy
is a source of corruption and origin of many flaws.
Today in the world, the ways to fight inflation are totally known.
Establishment of financial discipline will mean putting an end to the open
and hidden budget deficit of the government on the one hand and control of
liquidity in proportion to the real economic growth on the other hand. Is
there a listening ear or do we still believe that the wheel should be
reinvented? |
