Currency Lessons from 2018–2020: Decoding Intervention in the Market Fringes

Using the powers of Article 44 of the new law to enter the market's fringes is the central bank's new tool for deflating the bubble and suppressing inflationary expectations.

According to Mehr reporter, the structural changes in monetary policy and the face of the supervisory body with currency fluctuations have once again put the issue of how to manage the rate and regulate the market in the focus of expert circles. The experiences of 1397 to 1399 prove that the inflexible stand against the forces of supply and demand and the attempt to artificially stabilize rates with mandated tools, in practice led to the waste of foreign exchange resources, the deepening of the price gap, and the emergence of complex brokerage networks. At that time, after months of wasting reserves, the central bank was forced to accept the realities of the field and adopt a supply policy at the edge of the market; Although the approach was able to minimize the price gap and reduce the volume of street queues, it faced many bumps due to the lack of codified legal infrastructure and the inability to sustainably manage expectations. Now with the promulgation of the new law of the Central Bank, the platform of intervention has completely changed and the policy maker, with clear legal support, is looking for the implementation of a systematic and preemptive model in the currency market.

Rereading the capacities of Article 44 of the new monetary and banking law

One of the historical knots of the monetary policy maker in Iran has been the uncertainty about the limits of legal authority and the fear of legal consequences resulting from direct entry into foreign exchange transactions. In the past, the central bank's foreign exchange interventions were mainly based on emergency approvals, decisions of supreme councils, or partial licenses, which not only reduced the speed of the supervisory body's action against external shocks, but also resulted in the inaction of decision makers. Article 44 of the new law of the Central Bank was formulated precisely to eliminate this structural gap; This article explicitly provides broad, transparent and continuous authority to the central bank to buy and sell foreign currency at the desired rates without delay in the event of fluctuations and the formation of temporary imbalances.

The formalization of these powers means that the central bank is no longer an external observer or just a fragile stabilizer, but an active actor that can ride on the fluctuating waves and guide the direction of the market towards fundamental rates. The existence of this legal umbrella minimizes the risk of decision-making in times of crisis and allows the policy maker to implement targeted buying or selling strategies to stabilize macroeconomic stability without fear of accusations of misappropriation of resources.

Precious lessons from 1397 to 1399 and market margin test

To properly understand the current approach, it seems necessary to reread the currency events of 1397 to 1399. In those years, the policy maker first tried to control the exchange rate through rate suppression and definition of limited distribution packages; Unaware that the pumping of banknotes and remittances at prices much lower than the inflationary realities had no result other than rewarding speculative behavior. After intensifying the pressures, there was a change of policy and the body overseeing currency injection at rates very close to the market margin. The result of this change of approach was the rapid reduction of false demand, the emptying of speculative bubbles and the establishment of relative calm in the exchange market.

Nevertheless, the great weakness of that era was the instability of resources and inconsistency in controlling the flow of Rials. The continuous injection of banknotes in the absence of control of Rial transactions caused the country's resources to be exposed to erosion again with the change of non-economic variables. The great lesson of that period for today's policy maker is that entering the market margin should not be interpreted as a blind injection of reserves, but should be an intelligent tool for managing the market psychologically, clarifying the flow of Rial and preventing the policy maker from being trapped in the trap of formal demands.

Challenges of headline allocation; From national card to rent arbitrage

One of the most controversial means of intervention in different periods has been the supply of foreign currency through the national card mechanism and currency accounts. The primary logic of this mechanism is to provide the basic needs of society, prevent the general public from turning to informal sources, and deepen transparency by opening bank accounts. However, the effectiveness of this method is always measured by the challenge of arbitrage behaviors. Whenever there is a significant gap between the official injection rate of the central bank and the prices traded in the informal market, the intermediary network, by abusing the needs of vulnerable groups and renting national cards, causes the formation of false queues.

Although significant measures have been taken in recent years to connect foreign currency accounts to online registration systems, track deposit and apply capital gains tax, evidence shows that even a gap of two to three percent is enough to activate petty traders. For this reason, the central bank's big test in implementing the powers of Article 44 is to completely block any price gap; Because only if the guaranteed profit of arbitrage reaches zero, the attractiveness of abusing rented identities will disappear and the currency will reach the hands of real applicants for micro needs.

The need for immediate intervention to deflate the dollar bubble

Masoud Tawakli, an expert on financial markets, in an interview with Mehr, while evaluating the legal and executive aspects of this policy, stated: "Article 44 of the new law of the Central Bank has changed the tool of intervention from a reactive measure to a clear and legal authority; Therefore, the policy maker no longer needs interim approvals and should be present in the market with complete flexibility. In the current situation, when the dollar index in the global markets has entered a downward phase and external variables give a price drop signal, the central bank is obliged to provide the ground for a rapid reduction of the dollar rate in the domestic market with an immediate and intelligent intervention. Any delay and lack of timely intervention by the supervisory body in such situations can cause a heavy blow to the economy; Because the exchange rate is the driver of inflationary expectations and most of the general inflation is transferred to the society's livelihood through this channel.

This economic expert further emphasized: "Politicians should not watch the maintenance of false rates, but should actively allow the dollar bubble to deflate and prices to approach the real equilibrium level." Of course, the critical point of the story is that the injection on the market margin will be balanced only when the supply volume matches the real demand and the gap between the injection rate and the free market tends to zero. If the supply based on the national card creates a profit margin of a few percent again, dealers will attract injected resources with new tricks and abuse of the identity of vulnerable groups, and the policymaker's goal of controlling the fluctuation will not be achieved. "The ultimate solution lies in clarifying the allocation of remittances, deepening consensus transactions, and making banknote flow predictable, rather than relying solely on distribution mechanisms."

Monitoring of influencing variables and stable stability requirements

Successful intervention within the framework of the new law requires that the central bank differentiate between "short-term volatility management" and "adjustment of rates to fundamental variables". Trying to keep the exchange rate at a level disproportionate to the growth rate of liquidity and structural inflation is a failed policy that will eventually lead to the depletion of reserves. Therefore, entering the market margin should be combined with the use of derivative instruments, deepening the remittance market and coordination with monetary discipline policies in order to curb speculation and bring predictability to economic actors.

In the end, it should be said that Article 44 of the new law of the Central Bank has created a unique capacity to end the past inaction. The vital test of the supervisory body is to use this authority to quickly and concretely reduce the bubble of prices and at the same time to close the holes of rent distribution in the name of meeting small needs. If the central bank is able to coordinate the speed of its intervention with the realities of international and domestic variables, the national economy can come out of the heavy shadow of currency shocks and take a firm step towards lasting peace.