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January 2019, No. 90


Debate

President Rouhani & Currency Misunderstanding

Once, there were a few economists who always argued with us over the price of foreign currencies. For example, they said that if the US dollar goes up from 38,000 to 42,000 rials, the whole of Iran will become a rose garden. They said if the price of the USD is set at 42,000 rials, our exports will double. Nevertheless, we respect them and we should not just see one side of the coin. Economics is a sophisticated science and unlike what some people think it is not a book and the formulas they have read in books. No, economics has many ups and downs.”

The above is part of statements made by President Hassan Rouhani at a gathering of managers of the Ministry of Economic Affairs and Finance. At this meeting, the President raised the issue of considering a real price for the foreign exchange. Under the assumption that the growth of the exchange rate would increase the general level of prices and reduce the purchasing power of the people, governments over the past few decades have always tried to strengthen the national currency and stabilize the exchange rate by using its oil revenues. This is despite the fact that many economists believe that artificially curtailing the exchange rate and not adjusting it to the rate of inflation will lead to currency shocks. On this basis the government should gradually bring the exchange rate closer to its real rate.

In the opinion of these economists if the exchange rate is adjusted to inflation, it can increase production and exports. In this case, production will be justified, and incentives to export goods will increase and imports will decrease. But forex fluctuations in recent months, which began in the winter last year, triggered a sudden leap in exchange rates. While the government set the rate of the USD at 42,000 rials, it went up as much as 200,000 rials (for one USD). But this shock and leap only spurred uncertainties, and in many sectors, it killed the justification for production. 

Dr. Mousa Ghaninejad, Economist


“Free economy has been formulated on the basis of interaction with the world and requires a strong economic diplomacy rather than expecting exports with closed borders!” Ghaninejad said.


Ghaninejad: Misunderstanding!

Mousa Ghaninejad, an advocate of open economy, says: “In my opinion, there is a misunderstanding on behalf of the President in this regard, because no economist who believes in open economy would set a price and would not give a final comment on real prices.” He believes that economists adhering to open market economy have always had specific recommendations to the policymakers: First they should stop suppressing the prices, especially the price of foreign currencies, and, secondly, let the market mechanisms decide the prices. Meantime, the principles of free economy are fixed everywhere in the world; it’s not like you let one wing to fly and keep the other wing so tight and say fly!

Ghaninejad added: “The President has said that economists speak from the book; it is natural that economics is in the book and the economist prescribes what he learns to policymakers. The fact that with the realization of the forex price, the space will be created for the export of goods in the country is an issue all economists agree upon, but this is up to the policymaker to use this opportunity to export domestic products rather than blocking exports on the pretext of meeting domestic needs.”

He said no economist would think on the basis of a single variable and he would not say if a variable changes all the problems will be solved and Iran will become a rose garden. Free economy has been formulated on the basis of interaction with the world and requires a strong economic diplomacy rather than expecting exports with closed borders!

Dr. Mohammad Tabibian, Economist


“Please name the economist who has said if the USD is priced 42,000 rials (from 38,000 rials); Iran would become a rose garden” Tabibian said.


Economics Is in the Book

Mohammad Tabibian, an economist, commented on the President’s speech on his telegram channel: “Please name the economist who has said if the USD is priced 42,000 rials (from 38,000 rials); Iran would become a rose garden.” He added: “Economics, like all other sciences, is in the book. Anyone who fails to study the book properly, he will not know what economy is even if 500 years of administrative and commercial work is done. I wish the challenge against economy would stop because it would reform many trends.”

Terms of Exchange Rate Impact on Exports

Another economist, Pouya Jabal Ameli, commenting on the President’s speech, said: “Some recommendations were made by economists to the President to adjust the exchange rate with inflation because if this did not happen, it would lead to forex shock. This projection exactly came true and failure to adjust the exchange rate ended up in a shock. In fact, the unadjusted rate in the last four to five years was one of the main reasons for foreign currency shocks.”

Regarding the effect of the exchange rate on exports, he said if adjusting of the exchange rate takes place gradually and not shockingly, it can lead to the growth of production and export because it justifies the growth of national currency. This is while we are facing an exchange shock that has caused instability.

According to Jabal Ameli, the survey of the exchange rate in past periods shows that exports have affected the growth of the exchange rate whenever we pass through the shock phase, but if the adjustment of the exchange rate does not continue exports will be harmed. He emphasized: “Initially, there must be incentives for production and exports when the exchange rate comes to a point where production of any commodity is not cost-effective.”     

 

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