With a jump in foreign exchange prices in the open market in Iran, prices in the official market and the Integrated Currency Trading System (NIMA) market have relatively stabilized. But how reliable is such stability, and who will benefit?
In the last few days, the gap between the price of the dollar in the open market and that in the NIMA system has reached a historical level of 7,000 tomans. Over the last six months, this gap has tended to fluctuate between 3,000 and 6,000 tomans. The market, which was designed to reflect actual market conditions and engage and involve exporters and importers, has essentially lost its function and become useless.
NIMA was launched in spring 2018, just as the United States withdrew from the nuclear deal, the Joint Comprehensive Plan of Action (the JCPOA), causing the largest currency tsunami in modern history. The goal of the market was to “discover actual currency exchange rates” and "stabilize" and “unify” exchange rates. In reality, Iran has struggled over the last three years to force exporters to use the artificial market; it has also failed to meet the demand of importers. So how long can this situation continue?
The currency exchange rate in Tehran’s open market has exceeded 30,000 tomans. The value of the rial has reached its lowest level in history, and the signs of economic crisis have appeared in the foreign exchange market more than anywhere else.
The national currency has lost between a third and one quarter of its value in the market over a six-month period, and the price gap in multi-sided markets —where multiple groups of customers help boost economic value — has reached an all-time high. The gap between the price of the dollar in the open market and the official, subsidized price (4,200 tomans), has exceeded 26,000 tomans, according to an announcement by the Central Bank of Iran posted on its website.
Not only this, but the gap between free market prices and the markets of NIMA and SANA, the portal where exchange offices register their currency transactions, has also increased to an unprecedented level: each US dollar was traded in the open market at 30,650 tomans on December 7; each US dollar was less than 24,000 tomans for the NIMA portal — a difference of about 7,000 tomans, or a gap of 30 percent.
Some experts have linked the market fluctuation to the nuclear negotiations in Vienna, arguing that the failed talks have had a psychological knock-on effect, while others say what has happened in Vienna has had no impact.
Esfandyar Batmanghelidj, the founder of the Iran-Europe Forum, tweeted that the real foreign exchange market is still relatively stable, despite the jump in prices in the open market.
What is the NIMA Market and How Does it Work?
The Integrated Currency Trading System (NIMA) began officially operating a few days before the US’s official withdrawal from the JCPOA on April 23, 2018.
Under this system, importers and exporters engage in official foreign exchange transactions. Exporters convert their export dollars into rials in the market, and importers provide their dollars to the market, except for those who receive a preferred currency rate (4,200 tomans). On paper, the price of the dollar is determined by supply and demand and is supposed to be untouched by the tensions and psychology of the free market.
The market has the following goals: ”Discovery of the real exchange rate based on the supply and demand mechanism", “assisting in the stabilization of the currency exchange rate” and "helping to establish a single rate currency market.” But is this really the case?
The Fallacy of the Market
To draw a conclusion from Esfandyar Batmanghelidj’s tweet, the NIMA market has had no effect on currency market stability and failed to achieve its goal of equalizing rates; its role in helping discovering the actual rate has also not been successful.
This is down to government interference. From the outset, exporters have refused to pour currency back into the NIMA market — a serious issue that has led to complaints and official reports from the Audit Office.
Considering that the value of the dollar has fluctuated between 3,000 and 7,000 tomans over the last six months, it comes as no surprise that exporters have been less than willing to supply currency to NIMA. As a result, these investors have tended to keep their dollars abroad as much as possible, under a range of pretexts, and especially given the fact that sanctions are still in place. Otherwise, the value of their dollars would simply dissolve once incorporated into NIMA. Those investors who do use the NIMA market only do so because they are pressured.
On the other hand, some importers do favour the NIMA system, taking advantage of the cheaper and fluctuating price for dollars.
But how can a market where the position of supply and demand do not work in a similar way be recognized as a true market?
Can the NIMA Market Remain Stable?
Just days ago, Abdol Nasser Hemmati, the former head of the Central Bank, tweeted: "The Central Bank’s purchase of currency at the NIMA rate will be reflected in the growth of the monetary base."
This suggests that the government has tried to sell foreign currency it has earned from the relative opening of oil exports and the release of Iranian money that had been blocked before at NIMA rates. Hemmati's emphasis was on increasing the supply of rials and its contribution to a strengthening of the monetary base and inflation, but something else must be considered: the injection of the government's newly-obtained dollars into the NIMA market. In such an environment, the injection of billions of dollars has driven the relative stability of the NIMA market, and the relationship and interaction between exporters and importers is likely to play less of a role.
Whatever the factors, the current phenomenon is unlikely to last for long.