Political Economy of Policymaking of the Central Bank of the Islamic Republic of Iran in Currency Challenges Affected by External and Domestic Variables (2012-2018)

One of the economic and political means to impose the demands of a country, or in other words, to secure its interests by another country, is the use of sanctions. In this case, a large and influential country in the world of politics and economics will be able to impose restrictions on a smaller and less influential economy, imposing economic and political costs on another country. This situation will take on more serious dimensions if other important economic and political players in the world join the large sanctioning country. The situation that is envisaged regarding the sanctions imposed on the Iranian economy is that in addition to the political dimensions, the undesirable economic effects and consequences have also been significant over the years. In this regard, the role of the Central Bank in setting a favorable exchange rate policy is very important. Therefore, this article deals with "An analysis of the Central Bank's exchange rate policy in the currency crises of 2012 and 2018."
The importance of the financing mechanism and examining the impact of the central bank's behavior on this mechanism is one of the important issues that has always been of concern to economists in all economies of the world, especially bank-based economies. It seems that what caused the country's currency system to be severely affected in the 1391-1391 currency crisis was the lack of formation of a deep and efficient currency system and foreign exchange market in recent years. A deep foreign exchange market is formed when there are many price-sensitive factors and forces present on both the supply and demand sides of the currency, and their change in behavior or entry and exit does not affect the currency market.

Theoretical Framework

Iran has always had a positive trade balance due to the foreign exchange earned from oil and oil products exports. However, in the final months of 2017 and the beginning of 2018, the country's foreign exchange market was subject to significant fluctuations, and the exchange rate in the free market increased by more than 30 percent in the three months ending in Farvardin 2018, which, according to the standards of the foreign exchange crisis literature, was an example of a foreign exchange crisis. In response to the severe fluctuations in the exchange rate, the Economic Headquarters of the 12th government took action to define a preferential currency in order to protect consumers of imported goods against the increase in the exchange rate. According to paragraph 5 of the Cabinet resolution dated 1/22/2018, the exchange rate was set uniformly for "all" foreign exchange expenditures based on one dollar equal to 42,000 rials.

Methodology

This research, which was conducted using a descriptive-analytical method and using library resources and texts,

Results & Discussion

After 2018, the Iranian economy faced a currency shock resulting from the previous accumulation of liquidity along with sanctions, which also caused a sharp increase in the consumer price index. It should be noted that government revenues have been severely limited, and the decline in foreign exchange revenues, along with the lack of GDP growth, has reduced the government's domestic and foreign revenues, and as a result, the budget is facing a significant deficit. Therefore, it seems that the budget deficit will be the main factor increasing the "monetary base" and, as a result, inflation in the future, the impact of which on vulnerable groups is much greater than the increase in the price of basic goods.

Conclusions & Suggestions

Economic experts opposed to the preferential exchange rate believed that since high-income groups consume more goods covered by the preferential exchange rate than the lower deciles of society, this policy resulted in higher income deciles benefiting more from the aforementioned foreign exchange subsidy, and the policymaker's main goal of supporting the underprivileged segments of society through the allocation of preferential exchange rate was not achieved. On the contrary, it was the wealthy segments of society that benefited the most from the foreign exchange subsidy, and these problems led to the removal of preferential exchange rate from the Central Bank's foreign exchange policy package in subsequent years.