Wrong foreign exchange policies based on non-market factors exacerbate inflation

According to Ashura News, quoted by Tasnim, recently, Qalibaf, the Speaker of the Islamic Consultative Assembly, stated in a statement regarding the exchange rate: "What is being bought and sold now is market demand and is actually happening... The exchange rate is a variable of our macro economy and the currency itself has a market... When there is a demand for the currency and this demand increases the price of the currency, it means there is a problem in our macro economy."

He added: "If we announce the price of the currency at 60,000 tomans, but the price in the market is 90,000 tomans, (it is logical that you also) exchange your currency for 90,000 tomans."

He also noted in the end: "The difference between the inflation differential between the country and abroad (PPP) determines the price of the currency in a one-year trend."

A member of the Parliament's Economic Commission criticizes the Speaker's foreign exchange statements

Hossein Samsami, a faculty member of the Faculty of Economics at Shahid Beheshti University and a member of the Parliament's Economic Commission, responded to the Speaker's foreign exchange statements, saying: "Most of what you said about the economy, especially the foreign exchange, is fundamentally wrong based on the following arguments. I suggest that you change both your economic advisors and replace the economic department of the Parliament's Research Center with capable and knowledgeable individuals;

1- What do you mean by the foreign exchange market?! In economics, "market" has a specific definition, and the mess that we are witnessing in the field of foreign exchange does not at all resemble an "efficient market" for determining the "appropriate exchange rate" for the Iranian economy.

2- The main suppliers of currency in this disrupted market are those who, according to your words and orders, do not want to offer their currency at the official price (petrochemicals, steelmakers, etc.) and more than 95 percent of this black market are suppliers of smuggling resources, capital flight, speculation, and economic disruptors.

Therefore, your statements (regarding the lack of supply of currency at the rate of 60,000 Tomans) are essentially confirmation of the illegitimate and illegal activities of suppliers and demanders of this disrupted market.

3- In general, in economics, two categories of factors, "A: fundamental factors" and "B: expectations," are effective in determining the nominal exchange rate. The basis of these models is also based on PPP, of course, provided that we have an "efficient market" and then we can use these models to analyze the variable behavior of the exchange rate. Since we do not have an "efficient market" with these wrong foreign exchange policies in the economy, we cannot rely on these models in currency analysis. What mainly affects the exchange rate in the free smuggling market is the expectations of destructive actors and the wrong orientations of the country's officials (in the current international situation and economic war), which unintentionally contributes to the intensification of price expectations.

4- The incident that caused the majority of the esteemed members of parliament to impeach Mr. Hemmati was the same erroneous analysis that said, "Since the free market exchange rate for smuggling is higher than the official exchange rate, we must eliminate rent and establish a single rate by increasing the price and bringing the official exchange rate to the free market."

Therefore, in September of this year, with the support and pressure of Mr. Hemmati, the official exchange rate increased from 44,000 to more than 67,000 tomans and the free market exchange rate for smuggling from 58,000 to more than 93,000 tomans, greatly stimulating inflationary expectations in the market. Although the official exchange rate stabilized to a large extent after his impeachment, no noticeable policy change was made in other areas (such as gold and smuggling) and failed to change the stimulated expectations, and therefore we are witnessing a continuation of the past trend.

5- Your Excellency, you said, "When the dollar is 90,000 Tomans in the market, a person will not sell his currency for 60,000 Tomans." Do you now agree that the official (semi-commercial) currency, which accounts for more than 60 percent of the country's imports and the pricing of all national resources is done at this rate, should be increased to 90,000 Tomans? Do you think that the free market rate will remain at the same 90,000 Tomans and will not reach 150,000 Tomans? Won't you say again after a while, "It is natural that the exporter should sell the currency for 150,000 Tomans and 90,000 Tomans is cheap." And...? Tell me, how long should this trend continue!

Do you know that since 1369, this wrong and destructive process has been implemented in the same way, and the 7-toman currency has increased to 70,000 tomans (i.e. 10,000 times or equivalent to one million percent) and the national currency value has decreased by the same amount?! Didn’t you hear this analysis a few months ago from this same Mr. Hemmati and the government’s economic team? Didn’t you see what disasters this wrong analysis caused in 1401 and the people’s anger erupted with the deterioration of living conditions following the removal and increase in price of the official 4,200-toman currency? Why do our country’s officials get bitten by the same bug ten times and still don’t learn a lesson?!!

6- According to the literature on exchange rate economics, firstly, the nominal exchange rate is not supposed to increase in a mandatory manner and in line with domestic and foreign inflation. Secondly, in economies where the market determines the exchange rate, it has been proven in the short term that PPP does not explain the behavior of the exchange rate, and even analyses such as "Balasa Samuelson" reject its validity in the long term.

It is strange that your Excellency, without having any knowledge of exchange rate, easily makes such unprofessional comments in the national media!

Dear Dr. Qalibaf, what has caused the back-breaking inflations of recent years are wrong policies that believe that by leaving the exchange rate to the free market and the government's efforts to bring the official exchange rate to it, it can control inflation. It was with this wrong reasoning that the 1404 budget was closed and with its implementation in a few days, another wave of inflation will be imposed on society.

We have written repeatedly and also reminded the parliament that until the laws to combat money laundering, the law to combat smuggling of goods and currency, and the discussion of governance of the rial are implemented, there is no way to have a single currency and all efforts to standardize the currency will only lead to inflation.

Certainly, the important statements of the Leader of the Revolution regarding “strengthening the value of the national currency” and “reforming the currency system” will not be fulfilled with such erroneous analyses, and fundamental steps and reforms need to be taken in this direction and the entire system must also come to work.

I wish your Excellency would pay attention to the letter of 131 representatives of the parliament to the honorable president, or the 20-page text addressed to the honorable representatives, or the representatives’ proposal regarding eliminating the inflationary effects of the 1404 budget with a currency of 28,500 tomans.

Know that until the correct foreign exchange policies are implemented and as long as coins and currency replace the national currency and the government has no oversight or control over the country's foreign exchange flow, inflation cannot be controlled in any way (and under any circumstances).

As we have repeatedly stated; our economy is not at a dead end and even in the most severe conditions of sanctions, there is a way to improve the livelihoods of the people and the country's economy.