Iran FX and Inflation Report - Bahman 1400 (January 21 – February 19)
The Iranian calendar month of Bahman 1400 (January 21 – February 19) saw the Iranian rial strengthen in the free and NIMA markets as expectations rose for a positive conclusion to the Iran nuclear negotiations. In the goods and services market, monthly and annual inflation experienced a slight decline. ___STEADY_PAYWALL___
In the FX market, the free market rate began the period at IRR 279,200 and rose as high as IRR 281,700 before falling sharply to eventually settle IRR 262,000. The NIMA rate began the period at IRR 247,691 before falling to IRR 238,486. The rate ended the period at IRR 242,153. The spread between the two rates averaged IRR 30,730.
According to Consumer Price Index (CPI) data released by the Statistical Centre of Iran, monthly inflation was 2.11 percent in the month of Bahman, while annual inflation was 41.4 percent, showing small declines compared to the previous month. Goods prices rose by 2.77 percent. In the goods category, the highest monthly inflation was seen in non-durable goods prices with a rate of 3.16 percent, followed by 2.38 percent for semi-durables and 1.26 percent for durables.
Food CPI reached 528.8, meaning that monthly inflation was 4.07 percent while annual inflation was 53.9 percent. One of the highlights of this month’s inflation was the negative inflation of nuts and fruits—prices fell -0.1 percent.
Even so, Iranian economists have been commenting on the stubbornness of inflation. In an article, economist Teymoor Rahmani, outlines several reasons why inflation may be declining more slowly than expected. He points to the accumulated effects of high inflation in the Iranian economy, the rise in global inflation that is driving up producer prices, and the fragile inflation expectations related to the uncertain status of the Iran nuclear negotiations. Rahmani, concludes that the stubbornness of inflation is not related to government policies and is mainly explained by exogenous factors.
According to a report from the Islamic Republic News Agency, the optimistic turn in the negotiations over the future of the Iran nuclear deal, broke the dollar price floor in the FX market during the month of Bahman. IRNA states that the supply of foreign currency increased in the month of Bahman as speculators who had purchased foreign currency with the expectation that it would cross the IRR 300,000 rate, decided to sell given the downward trend in the exchange rate. Reports suggest that currency traders began to take the restoration of the Iran nuclear deal more seriously, following the Biden administration’s provision of waivers permitting civil nuclear activities related to the nuclear deal.
FX Rates
Inflation
Iran FX and Inflation Report - Dey 1400 (December 22 – January 20)
A more positive atmosphere surrounding the negotiations over the future of the Joint Comprehensive Plan of Action (JCPOA) buoyed the FX market in Iran during the Iranian calendar month of Dey 1400 (December 22, 2021 – January 20, 2022). The free market exchange rate declined while the NIMA rate held steady, decreasing the spread between the two rates. However, monthly inflation rose on the back of the previous month’s exchange rate increase. ___STEADY_PAYWALL___
The free market rate declined from a peak of IRR 302,000 to end the month at IRR 279,500. The NIMA rate rose slightly, rising from IRR 244,820 at the beginning of the month to IRR 250,466, before settling at IRR 247,737. The spread between the two rates fell from IRR 57,180 to IRR 31,763.
According to the Statistical Center of Iran, the national consumer price index (CPI) reached 388.2 in the Iranian calendar month of Dey, putting the monthly inflation rate at 2.37 percent, up from 1.66 percent in the previous month. Still, the annual inflation rate fell 1 percentage point from the previous month to 42.4 percent. The bounce back in monthly inflation was led by a rise in services prices, which rose 2.5 percentage points to 3.56 percent month-to-month, and an increase in housing prices. Rent prices rose 4.4 percent in Dey.
Iranian media attributed the strengthening of the rial to positive news emerging from the JCPOA negotiations. Meanwhile, the Iranian president’s state visit to Russia and the Iranian foreign minister’s visit to China, both of which led to reports that major cooperation agreements would soon be “implemented,” did not lead to significant movements in the FX market, indicating that the FX market is more sensitive to negotiations that could lead to the lifting of U.S. secondary sanctions.
During the month of Dey, Iran’s central bank governor, Ali Salehabadi held a meeting with leading economists. During the meeting he reassured them that he would take action to tame inflation, promising a package of reforms to the banking sector that would slow growth in the money supply.
FX Rates
Inflation
Iran FX and Inflation Report - Azar 1400 (November 22 – December 21)
The Iranian calendar month of Azar 1400 (November 22 – December 21) saw the free-market exchange rate rise significantly, while monthly inflation fell for the third month in a row. Economic policymakers and experts also debated the outlook for the next Iranian calendar year as the Raisi administration submitted its 1401 budget. ___STEADY_PAYWALL___
The free market exchange rate rocketed from IRR 284,800 at the beginning of the month to IRR 311,000—the highest rate since October 2020—before settling at IRR 302,800. Whereas the NIMA exchange rate had remained stable in recent months despite the fluctuations in the free market, the NIMA rate rose about 4 percent to end the month at IRR 245,346. Because of the faster increase in the free market exchange rate, the spread between the two rates increased from IRR 48,759 to reach a high of IRR 74,279, before ending the period at IRR 57,454.
According to data from the Statistical Center of Iran, the Consumer Price Index (CPI) reached 379.2, representing a monthly inflation rate of 1.66 percent. The annual inflation rate fell to 43.4 percent from 44.4 percent in the previous month. The monthly inflation rate in services was 1.01 percent, compared to 2 percent for goods. Among goods, durables continued to show the highest price increases with a monthly rise of 3.8 percent. The monthly inflation rate among semi-durable and non-durable goods were 2.88 percent and 1.48 percent respectively. Monthly inflation in food prices was 1.38 percent, the lowest level in six months and down from 3.18 percent in the previous month. The monthly increase in healthcare costs was 1.35 percent.
The influential financial paper Donya-e-Eqtesad published three different inflation scenarios for the end of the Iranian calendar year. Based on these scenarios, the annual inflation is forecasted to be between 39.9 and 41 percent. In a separate article, the newspaper cited a report by Fitch Ratings in which it has been forecasted that Iran will get out of stagflation in 2022. The Fitch assessment is predicated on the restoration of the JCPOA, which would see oil production and exports rise, reducing the pressure on the rial. In such a scenario, Fitch expects Iran to experience an inflation rate of 8 percent and economic growth of 4.4 percent in 2022. Similarly, analysts at the Economist Intelligence Unit predict that an interim deal is the most likely outcome of the nuclear talks. In such a scenario, they forecast that Iran’s exchange rate will fall to an average of IRR 206,000 in 2022 and IRR 185,000 in 2023, before beginning to rise again, reaching IRR 287,000 in 2026.
Aside from sanctions relief scenarios, the Raisi administration submitted its budget for the Iranian calendar year of 1401. As part of this budget, the government is seeking to eliminate the official subsided dollar exchange rate of IRR 42,000, opting instead to provide targeted cash transfers to ease the impact of any price increase on vulnerable households. The proposed reform, which was also considered by the Rouhani administration, is controversial because of the use of the subsidised exchange rate to import a small list of essential commodities including wheat and medication. If the reform is approved it will increase the ease with which the Central Bank of Iran can supply foreign currency into the NIMA market.
FX Rates
Inflation
Iran FX and Inflation Report - Aban 1400 (October 23 – November 21)
Monthly inflation fell in the Iranian calendar month of Aban (October 23 – November 21). The easing in inflation was aided by the fact that while the free market exchange rate rose, the NIMA rate, used by Iranian importers, remained relatively stable.
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In the FX market, the free market rate began the period at the rate of IRR 276,500 and rose IRR 287,200, a record high for this Iranian calendar year, before decreasing slightly to end the period at IRR 283,800. Meanwhile, the NIMA market sustained an increased average rate of IRR 233,801, with minor fluctuations between minimum and maximum rates of IRR 231,847 and IRR 236,659. The spread between the free market and NIMA rates widened, ending the period at IRR 47,479.
According to the data released by the Statistical Centre of Iran (SCI) the Consumer Price Index (CPI) rose to 373, meaning monthly inflation was 2.4 percent, down from 3.7 percent in the period month. The annual inflation rate fell from 45.4 percent in Mehran to 44.4 percent in Aban. The easing of inflation was led by a reduction in the monthly inflation of food and health prices, which declined 3.2 and 1.5 percent respectively. Monthly goods and services inflation declined, although monthly inflation in durable goods surged from 1.2 percent in Mehr to 4 percent in Aban.
Seyed Massoud Mirkazemi, head of the Planning and Budget Organization, tweeted that the easing inflation was a result of the Raisi government opting not to borrow money from the Central Bank of Iran despite the economic difficulties.
Another factor appears to be the stability of the NIMA exchange rate. Iran’s central bank governor Ali Salehabadi, cited an improvement in the government’s foreign revenue for the relatively stability in foreign exchange markets, noting that revenue has tripled compared to last year. Because of these higher revenues, Salehabadi claimed that the central bank faces no challenges in supplying the NIMA market. According to data from the central bank, so far in the Iranian calendar year 1400, USD 18.1 billion in foreign currency has been traded on the NIMA platform, a 69 percent increase compared to the same point last year.
FX Rates
Inflation
Iran FX and Inflation Report - Shahrivar and Mehr 1400 (August 23 – October 22)
Editor’s Note: The data for Shahrivar and Mehr are being released as one report due to author availability last month.
The Iranian calendar months of Shahrivar and Mehr 1400 (August 23 – October 22, 2021) saw a steady decrease in the value of the rial as the free-market rate rose to its highest point since November 2020. While monthly inflation fell between Mehr and Shahrivar, prices continued to rise in key categories. The annual inflation rate for food products reached 61 percent.
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In the FX market, the free-market rate reached a high of IRR 282,500 in August and a second peak of IRR 284,500 in September, the highest rates since November 2020. The free-market rate showed little volatility over the course of the two months. Likewise, the NIMA rate trended steadily upward. Given the steady increase in the NIMA rate, the gap between the two rates narrowed from IRR 46,582 to IRR 40,385 by the end of the period.
According to the data released by the Statistical Centre of Iran (SCI), the consumer price index (CPI) reached 364.1 by the end of Mehr, marking a monthly inflation rate of 3.7 percent, down 0.2 percent from Shahrivar. Annual inflation fell from 45.8 percent in Shahrivar to 45.5 percent in Mehr, while the point-to-point inflation rate was 43.7 percent and 39.2 percent in Shahrivar and Mehr respectively. The fall in monthly inflation was mostly attributable to an easing in the rise of goods prices. Monthly goods inflation was 4.7 percent in Shahrivar, falling to 3.9 percent in Mehr. Food prices continue to be a primary contributor to overall inflation. According to the new data from SCI, food prices in Mehr were 61 percent higher than in the same month last year.
Spurred in part by rising food prices, there has been a renewed debate in Iran over the risks associated with eliminating the provision of subsidised foreign currency to importers at the dollar exchange rate of IRR 42,000. The Central Bank of Iran has already significantly reduced the number of goods that are eligible to be imported with the benefit of subsidised foreign currency. For this reason, economist Zahra Kaviani believes that the elimination of the subsidies will have a limited impact on prices, particularly on food prices. The benefits of such a move include reducing fiscal pressures and also increasing the supply of foreign currency so as to reduce the NIMA rate. This view was echoed by Vienna-based economist Bijan Khajepour in his recent analysis of the debate taking place in Iran.
Other observers have argued against such a move. Kamran Nadri, a professor of economics at Iman Sadegh University, an institution with which many senior policymakers in the Raisi administration are affiliated, have warned that elimination of the subsidised rate would feed inflation expectations. In his view, the abuses of the subsidised rate, which involve importers using currency allocations to import non-essential goods, are best addressed with better monitoring and enforcement. Economist Hossein Raghfar has warned that eliminating the subsidy could feed public dissatisfaction and even unrest.
