Foreign Exchange Policy & Management During Structural Adjustment: The Case of Iran

An important ingredient of structural adjustment policies is the reform of the foreign exchange system. Rationalization of the exchange rate can potentially improve both domestic resource allocation and the external position. In Iran, unification and flexible rates introduced as a policy package on March 21, 1993 were designed to achieve this objective. After a few months of relative stability the market exchange rate depreciated rapidly and exhibited excessive volatility. As a consequence, inflationary pressures intensified and macroeconomic uncertainties heightened. In reaction, the government reversed the currency reform process and halted certain other liberalization programs associated with the structural adjustment reforms. This paper describes the background and justification for rationalizing the exchange rate system. Moreover, by drawing on what economists have learned from the experience of other developing countries, it can be concluded that the Iranian experience is not unique and that the outcome conforms to the predictions of the standard models.