Unified exchange rate counters rent-seeking

The incumbent government managed to unify foreign exchange rates after 10 years of a multi-tier system. The unified rate will create a hedge against rent seekers seeking to benefit from the currency crisis.

The move will have a positive impact on the foreign exchange market in the short term. However, discretionary powers exercised by the government will not be effective in the long run.

The unified rate of 42,000 rials for a dollar will prevent further currency nosedive which could have led to a chaos.

A multi-tier exchange rate only benefits rent seekers and corrupt economic elements. In fact, the steps taken by the government to introduce the unified system will avert corruption in the forex market.

Presently, officials should be aware that the government cannot resolve the currency crisis through state involvement and setting prices by issuing discretionary orders. To overcome this problem ‘economic wellbeing’ must be restored to the national economy.

The Central Bank of Iran (CBI) should balance exchange rates based on the inflation rate which instigate the devaluation of the national currency. Otherwise, a multi-tier exchange rate will raise its ugly head once again and pave the way for economic corruption. Hence, those who have access to cheaper currency rates will seize the opportunity to operate as rent seekers.

Experts say the inflow of huge liquidity into the market contributed to the depreciation of the rial against the dollar over the past weeks.

Some financial institutes, which operate illegally, serve as rent seekers.

They played a major role in the illogical demand for hard currencies since the supply-demand cycle determine the prices in the forex market.

In fact, the activities of these institutes exacerbated the currency devaluation. Besides, inflation and lack of favorable contacts with the international community also led to the currency crisis in Iran.

As a result, in addition to stabilizing the national economy, the government should also boost global interactions.