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Price hike in forex market in line with economic realities

Tehran, 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 above-mentioned 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.

Source: Islamic Republic News Agency - IRNA


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