The Central Bank of Iran (CBI) set up a secondary market for foreign exchange due to a major change in Iran's foreign exchange policy which resulted reduction in the availability of foreign currency and the volume of foreign exchange transactions.
According to Valiollah Seif, Governor of the CBI, this decision was made to control the currency market and because the Iranian rial has dropped to an all-time low against the US dollar, which creates difficulties for importers and it might get worse due to US new sanctions against Iran.
The new alternative market enables exporters of non-oil products to sell their foreign currency earnings to importers of consumer goods, Valiollah Seif said.
After the change in Iran's foreign exchange policy on April 2018, several factors caused reduction in the availability of foreign currencies. Some of the main factors are as follows:
- New restrictions on sale and purchase of foreign currencies,
- The new regime's uncertainties,
- Currency sale limits on exchange houses,
- Significant difference between the pegged rate and the rate at which parties were willing to transact,
- The reluctance of exporters to repatriate earnings.
Although, the Government is trying to supply foreign currencies to import essential goods, importers of non-essential products and services faced many problems due to the shortage of foreign currencies. Also, because their foreign currency revenues were limited under the influence of the new obligation.
The secondary foreign exchange market makes it possible for importers to purchase foreign currencies directly from the exporter of goods. There are exceptions for trading of petroleum, petrochemical products, condensate, steel products and heavy metals.
How to use alternative market for foreign currencies?
According to CBI's announcement, the alternative foreign exchange market will operate through two platforms named NIMA and ISC.
CBI's NIMA platform operates to regulate foreign exchange transactions by enabling exporters to sell foreign currencies to exchange houses who must then on-sell the currency to importers of non-essential goods with a valid import registration order in place.
ISC platform is the Ministry of Industry, Mines and Trade's Integrated System of Certificates which authorises domestic agent banks to act as intermediaries between exporters (as seller) and importers (as buyers) of foreign currencies.
In both platforms, the price of each transaction will be agreed between importer and exporter. And in this new market, exporters by selling their foreign currency earnings, don't need to repatriate those income.
To operate via ISC platform, exporters and importers need to take the following actions:
- The Exporter needs to permit the importer to register an order for foreign currencies by sending information about its export licence to the importer.
- After above step, the importer registers exporter on ISC and refers to a bank which acts as an agent, to place the purchase request.
- Then the bank needs to ask confirmation from exporter for selling the foreign currency to the importer. Also, it should enquire from the Central Bank of Iran as to volume of the foreign currency.
- After above approvals, a guarantee of importation will be provided by the importer, then the foreign currency which is the subject-matter of the export license, will be reserved with the CBI by the agent bank. Also, the payment method as well as received goods' transportation documents, must be register in the Foreign Exchange Obligations Management Portal (SAMTAK portal)
- The source of the foreign currency which is to be transferred, will be registered on ISC platform by the importers.
- At the last stage, a declaration of foreign exchange supply will be issued by the agent bank to enable the importer in clearing its goods at customs.
Total portion of Iran's non-petroleum export income which is generated by the exporters who can participate in the secondary foreign exchange market, is 20% of the total revenue. It remains to be seen that whether this portion of revenue satisfies the demand of importers of non-essential products.
Although the secondary foreign exchange market will reduce the impact of sanctions on Iran's economy, there are a few uncertainties, for instance, there is no clear directive to address the import of services, also, it is not clear that whether to convert foreign currency to rial, parties should use the CBI pegged rate or they can agree to use the rate indicated in the new market.
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