The move on Wednesday is seen as part of efforts to circumvent restrictions on accessing the US currency amid tensions with Washington, as well as prevent market instability generated due to fluctuations in the value of Iranian rial against the dollar.
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In a cabinet meeting, the government decided that all ministries, state organisations and companies should report based on a euro-rial exchange rate, which the Central Bank of Iran will be tasked to report frequently, state-run IRNA news agency said.
It was not clear when the decision would become effective, but business owners said they waited for the new policies to take effect.
“I assume if they use euro as the official currency, this will reduce the psychological impact of fluctuations of rial against the dollar,” Newsha Sheikh Soleimani, a Tehran-based importer of raw materials for the tile and ceramic industry, told Al Jazeera.
“Our company trades mostly in euro, but still some of the invoices are issued based on rial-dollar exchange rate.”
She said her firm had recently put on hold all transactions amid uncertainty over the value of foreign currency.
“I welcome any move to bring back stability to the foreign exchange market.”
Valiollah Seif, the Central Bank chief, had earlier said it is not “logical” to use the dollar in financial reporting.
Iran’s trade revenues are obtained mostly in euro due to sanctions on the US dollar, he said. Therefore, added Seif, the country’s financial reports should use a reference currency that is more stable and widely used in trade.
As part of Iran’s 2015 nuclear deal with the world powers, all sanctions related to Iran’s controversial nuclear programme were lifted.
Nevertheless, due mostly to lingering tensions with the US, limitations still remain on Iran’s access to the US currency.
These restrictions have contributed to a fall in the value of rial against the dollar in the past months.
Each dollar was traded for an all-time high of 60,000 rials last week, triggering serious concern among Iranians over the stability that President Hassan Rouhani had brought to the economy by controlling the foreign exchange rates.
Since summer last year, the rial has lost roughly 50 percent of its value against the US currency, which some Iranians buy in large numbers as an investment at times of economic uncertainty.
A sudden decline in rial’s value is expected to result in an increase in the price of imported goods and push up the inflation rate.
To control the currency crisis, the government last week froze the free market trading of the US currency by introducing an official rate of 42,000 rials for each dollar.
The Central Bank said it will only provide dollars for registered consumers for specific purposes, while free trading of the foreign currency would be deemed illegal.
Seif, the Central Bank chief, faced furious legislators last week when he took the parliamentary podium to explain the new forex policies.
He said he suggested to the Supreme Leader Ayatollah Ali Khamenei that the country should use the euro in foreign trade instead of the US dollar.
Meanwhile, a currency trader told Al Jazeera that the new policies are “good news for importers and exporters”, but added that there was still a lot of uncertainty, which has created confusion for his business.
“Even if the government does officially replace the dollar with the euro, still the dollar is traded and invested in by many in the free market,” he said, preferring to stay anonymous.
“I hope these decisions are not just temporary measures – as if short-term remedies to reduce a fever – as international restrictions on the dollar affect our economic stability.”
There have been mounting concerns among Iranian businesses over a possible withdrawal of the US from Iran’s nuclear deal.
US President Donald Trump is expected to decide by May 12 whether his administration will re-impose sanctions lifted as part of the nuclear pact.
He believes the deal is flawed as it does not address Iran’s missile programme, as well as its military presence in the region.
Iran says its missiles are for defence purposes.