Perspective: The effect of exchange rate unification on industrial investment
The country’s economy and industry experienced exchange rate equalization policies during the 1970s and 1980s and are set to experience them again this decade. Unlike previous decades, the policy of exchange rate unification is being implemented gradually.
The first step dates back to April 2013, when the reference exchange rate was eliminated and since then, the industry has experienced only two free exchange rates. The next stage was carried out earlier this year with the Central Bank’s instruction that banks should be free to exchange foreign currency at the free exchange rate, and in the third stage, the removal of a number of tariff lines is subject to the exchange rate. The final stage is the complete elimination of the government exchange rate and the recognition of the exchange rate based on the free market mechanism. The point about the exchange rate unification policy is its durability. Since the mainstay of the exchange rate unification policy is the foreign exchange earnings from oil exports and related products, it is not possible to predict economic shocks in such circumstances, so it is expected to return to a double or multiple exchange rate. The viability of the exchange rate equalization policy depends on the degree of competitiveness of the manufacturing and industrial sectors, which does not assess Iran’s position in this regard. Although exchange rate policy is a short-term solution to some of the industry’s challenges, it is certainly not a long-term solution to the industry’s prosperity.
Exchange rate unification, if done in accordance with the realities of economics and industry and within the framework of government duties and based solely on the central bank’s regulatory aspects of the foreign exchange market, can lead to the growth of the industrial sector in attracting foreign and domestic investment. Currently, the most important major challenge for the industry is the reduction of investment and the bottlenecks associated with capital accumulation in this sector.
Investment in the industry has declined significantly in recent years. The value of investment in industries of more than 10 workers has experienced a decreasing trend since 2007 and during the period 2014-2017, has decreased by 11% annually. Thus, one of the important challenges of the industry, which affects the future growth prospects of this sector, is the slow accumulation of capital. It is noteworthy that in the draft of the Sixth Development Plan, the growth rate of targeted investment in the industry and mining sector is 18.8%, of which 22.2% of the annual financial resources are projected to achieve this growth from foreign sources. This is while in the last two years, despite the stability in many economic variables, foreign direct investment has decreased by 2.5 percent. Iran’s economy attracted $ 2.105 billion in foreign direct investment in 2014, up from $ 2.50 billion in 2015. According to the Minister of Industry, Mines and Trade, more than four billion dollars of foreign investment commitments have been registered in the industry and mining sector so far. According to the plan of the Ministry of Industry, Mines and Trade to attract foreign investment in major industries, especially in the automotive and machinery industries, the implementation of a monetary exchange rate policy to create transparency and reduce risk, will accelerate the implementation of these contracts and the success of industrial investment.
One of the most important financial resources envisaged in the Sixth Development Plan bill to achieve an annual growth rate of 18.8% for industrial and mining investment is bank facilities, which account for 24.8% of total financing. Due to the limited foreign exchange resources of banks, allowing banks to buy and sell foreign currency at free market prices causes a stagnant flow of foreign exchange resources, including household dollars, exporters of goods and services to banks, and this can affect the ability of banks to provide foreign exchange and rial facilities. Lead logically from industrial investment projects.
Director of the Research Institute for Economic Studies and Competitiveness of the Institute for Business Studies and Research
The world of industry