Central Bank of Iran defends exchange rate policy as rial spirals

Central Bank of Iran defends exchange rate policy as rial spirals
Iranian are moving back to the black market dollar as unease spreads. / CC: EcoIran
By bne Tehran bureau February 26, 2024

The Central Bank has responded to increasing criticism regarding its decision last month to permit banks to sell certificates of deposits (CoDs) with a 30% interest rate.

Iran's economy, beset by sanctions and internal mismanagement, has long been precarious. Yet the recent dramatic depreciation of the Iranian rial—plunging over 15% to 582,600 against the dollar on the open market on February 27—underscores a new chapter in the nation's protracted financial crisis. This latest sharp decline, triggered by the death of three Americans in a drone strike by Iran-backed militants, has not only intensified the economic woes of a country already grappling with inflation exceeding 50% and unemployment rates nearing 10% but has also deepened the socio-economic divide, affecting Iranians across the spectrum of society.

Financiers lamented the Central Bank of Iran (CBI) for attempting to control the growth of exchange rates in previous months by introducing a financial mechanism to move people away from buying dollars on the street.

Despite the recent stability in the currency market, experts argue that banks may struggle to meet the high returns, given the unlikelihood of business activities generating such substantial profits.

In addition to the CoDs adverse effects, many believe that the slowdown in exchange rates was primarily due to stability in the country’s political standing, as the spike in exchange rates was more of a response to the escalating risk of regional conflict following the US servicemen’s killings.

In its statement, the CBI said its focus on controlling inflation and supporting production was the key to its currency strategy.

It stated that the primary objective of CoDs was to channel resources towards productive sectors, thereby fostering economic growth and job creation. The CBI also refuted claims of selling CoDs to corporations, stating that retail investors comprised the majority of buyers.

The interest rate on deposit certificates is determined based on the returns of the projects.

The statement further asserts, “These projects have undergone scrutiny and approval by the banks' boards of directors, undergone special auditing, and will be monitored by the banks to ensure proper utilisation of funds.”

Furthermore, the Central Bank clarified its intentions to use special deposit certificates to provide working capital for businesses. These certificates will be issued for specific enterprises and projects, with the allocated funds dedicated solely to financing the applicants.

However, behind the scenes, the Bank is increasingly injecting dollars into the Ferdowsi Street market to calm potential panic, according to several experts who are increasingly concerned that the current management of the CBI is beginning to lose their grip on the situation. 

The re-imposition of sanctions by the US, following its withdrawal from a nuclear agreement (JCPOA), has not only stifled economic growth but has also propelled more Iranians into the throes of poverty. This punitive external pressure, coupled with internal economic mismanagement, has left the Iranian economy teetering on the brink, with little hope for a swift recovery.

Meanwhile, in the gold markets in Tehran and other cities, each gram of 18-carat gold reached IRR30mn earlier on February 27, as people switched to holding the fine metal as a security measure.

Gold sovereign prices have also increased in recent hours, with the Azadi and Emami (previously known as the Pahlavis) trading for IRR318mn and IRR339,500,000, respectively.

Prices are expected to climb in the run-up to the Persian New Year Nowruz, which happens on March 20 this year. Annually, from the first weeks of March until the holiday period, Iranians regularly purchase gold, as annual prices for goods come into effect in the first week of April.