Price hike in forex mar­ket in line with eco­nomic re­al­i­ties

Iran Daily - - Domestic Economy -

By Hadi Haqshenas

Re­cent fluc­tu­a­tions in the hous­ing, gold and cur­rency mar­kets were pre­dictable since con­di­tions in these mar­kets were ripe for sig­nif­i­cant rise in prices.

Hence, an in­ter­nal or ex­ter­nal eco­nomic shock was enough to set the prices on their real course. In other words, the sit­u­a­tion of these mar­kets, which ex­pe­ri­enced sta­bil­ity from Au­gust 2013 un­til Septem­ber 2017, was not in line with eco­nomic re­al­i­ties. This is be­cause dur­ing the said pe­riod the in­fla­tion rate, on ag­gre­gate, was 60 per­cent while these mar­kets had not seen a rise in prices.

When an econ­omy has to deal with in­fla­tion, prices of goods and ser­vices can­not re­main sta­ble and have to rise. The shock has also im­pacted the hous­ing mar­ket which was in re­ces­sion af­ter 2013. Nowa­days, hous­ing prices, par­tic­u­larly in the cap­i­tal Tehran, have in­creased.

The rise in the value of the dol­lar against the rial has an im­pact on the gold mar­ket in a short pe­riod of time since the prices of gold and dol­lar are in­ter­linked.

Hence, the ongoing rise in the hous­ing, gold and cur­rency mar­kets stem from lack of a growth in prices over the past years. Now the ques­tion is that whether we will wit­ness fur­ther rises.

The an­swer is that we will wit­ness min­i­mum fluc­tu­a­tions. Like­wise, there will not be a new shock which could lead to a sig­nif­i­cant rise in prices.

In fact, in­fla­tion, which had been ac­cu­mu­lated, over the past years con­trib­uted to a price rise in the above­men­tioned mar­kets.

Be­sides, the Mehr hous­ing scheme driven by the ad­min­is­tra­tion of for­mer pres­i­dent Mah­moud Ah­madine­jad (2005-13) caused the pri­vate sec­tor to scale down con­struc­tion. This has also played a ma­jor role in price rise in the hous­ing mar­ket.

Since Pres­i­dent Has­san Rouhani as­sumed of­fice in 2013, his ad­min­is­tra­tion spared no ef­forts to con­tain a gal­lop­ing in­fla­tion which was around 40 per­cent un­der the for­mer govern­ment.

The Rouhani ad­min­is­tra­tion man­aged to record a sin­gle-digit in­fla­tion rate. This averted a rise in the gold and for­eign cur­rency mar­kets.

One dol­lar is cur­rently ex­changed for up to 70,000 ri­als in the open mar­ket al­though the of­fi­cial rate is about 42,000 ri­als.

If the in­fla­tion rate had sky­rock­eted un­der the Rouhani govern­ment, as it did un­der its pre­de­ces­sor, the rial would de­pre­ci­ate by 200-300 per­cent against the dol­lar.

Presently, the rise in the hous­ing, gold and cur­rency mar­kets could cush­ion the blow of the lat­est US sanc­tions against Iran. As a re­sult, once these sanc­tions come into force, we will not wit­ness a multi-fold rise in prices.

In April, the Rouhani govern­ment an­nounced a uni­fied rate of 42,000 ri­als to the dol­lar in a bid to tackle forex mar­ket crisis. Presently, the ad­min­is­tra­tion should take steps to pave the way for this of­fi­cial rate to be­come closer to the open mar­ket rate.

The govern­ment should in­stantly re­move this gap which cre­ates rent-seek­ing. Sup­ply­ing this of­fi­cial rate while the open mar­ket rate is much higher is tan­ta­mount to squan­der­ing the coun­try’s for­eign cur­rency re­sources.

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