Iran FX and Inflation Report - Bahman 1399 (January 20 - February 18)
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The Iranian calendar month of Bahman (January 20 – February 18) saw an uptick in inflation, driven in part by an increase in both the free market and NIMA exchange rates. In particular, the food prices registered a significant monthly increase.
The FX market began the period with rates of IRR 229,500 and IRR 229,234 in the free market and the NIMA market respectively, with both rates increasing over the course of the month. The free market exchange rate increased 13.29 percent, while the NIMA exchange rate ended the month 2.67 percent higher. The spread between the two rates widened to end the month at IRR 24,653.
According to Consumer Price Index data released by the Statistical Centre of Iran (SCI), the general national Consumer Price Index (CPI) indicates a monthly inflation rate of 2.49 percent. Good prices rose 3.35 percent while prices for services increased 1.03 percent. A key cause of higher the highly monthly inflation rate was the 5.46 percent increase in food prices, with the sub-category for sugar, jam, honey, and sweets seeing a significant 11.8 percent rise in food prices.
While some of these increased may be attributable to the forthcoming Iranian new year holiday, Nowruz, Asadollah Kargar, the head of Iran’s fruits and vegetables sellers union, stated that the main reason for the price jump of fruits and vegetables was increases in the price of production factors such as pesticides, fertilisers and transportation.
Based on calculations of the Economic Research Department of the Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIM) if the monthly inflation of the final month of the year 1399 falls somewhere between 1 to 4 percent, annual inflation will be somewhere between 36.3 to 38 percent, a total which is 12 to 16 percent higher than the inflation rate target set by CBI.
The governor of the Central Bank of Iran (CBI), Abdolnasser Hemmati, stated in the first week of Bahman that cash transactions between importers and exporters in the NIMA system were flowing well and reported that on average more than USD 150 million of foreign exchange was supplied in NIMA on a daily basis. Hemmati pointed to positive news regarding oil exports from as a signal for future stability in the FX market.
According to Hemmati, since the beginning of the year 1399, USD 9.2 billion worth of foreign currency has been provided by the CBI at the exchange rate of IRR 42,000 for the importation of essential goods such as wheat, corn, medicine, and medical equipment. Additionally, he explained that the average daily supply of foreign currency in NIMA in the month of Bahman, which has been more than USD 80 Million, is almost double the daily transactions of foreign currency and there is more supply than demand.
Over the past few months, there have been renewed debates over the elimination of the official exchange rate of IRR 42,000 as well as unification of the exchange rates. Hemmati in an interview expressed hope that with an increase in oil exports the FX market will be stabilised in the future. He supported unification of exchange rates, but also raised some concerns. He explained that elimination of the official exchange rate has to be conducted prudently in order to avoid price shocks that would hurt consumers. Hemmati also discussed the target annual inflation rate of 22 percent and stated that the targeted rate was based on an assumption that the NIMA exchange would stabilise around IRR 170,000. He suggested that the current inflation rate is due to the influence of the exchange rate on inflation expectations.
FX Rates
Inflation
Iran FX and Inflation Report - Dey 1399 (December 20 - January 19)
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The Iranian calendar month of Dey (December 21 – January 19) was highlighted by substantial decrease in the free market exchange rate and a smaller decrease in the rate available in the NIMA market. The NIMA rate exceeded the free market rate for the second month, setting a record-low spread. Looking to prices for goods and services, the month of Dey saw the lowest monthly inflation of the year 1399 in the Iranian calendar.
The FX market began the period with rates of IRR 257,500 and IRR 256,251 in the free market and the NIMA market respectively, followed by steady trends up until the first week of January, when the free market rate declined from IRR 261,500 to IRR 249,000 between January 5 and 9. The rate fluctuated around IRR 250,2000 until January 12, after which there was a sharp drop to a rate of IRR 214,500 by January 18, which was followed by a small to end the period at IRR 221,000 on January 19.
In the meantime, the NIMA market experienced the same overall trend, with movements lagging the free market rate by about 4 days. The movements in the NIMA rate were at a smaller scale, with a mid-period decline from IRR 256,172 to IRR 250,186 between January 9 and 14, followed by a steady trend and then a drop, ending the period at IRR 238,178. The movements of the free market and NIMA rates pushed the spread between the rates downward—the spread of IRR 35,348 on January 18 was the largest since the adoption of the multi exchange rate system in 2018, although it rebounded by over 50 percent to IRR 17,178 the following day.
Mohammad Lahooti, the head of the Iran Export Confederation, in an interview with Iranian Students’ News Agency (ISNA), elaborated on the reason behind the NIMA rate exceeding the free market rate. He explained that since the free market rate is where small exchange bureaus sell foreign currency, their decisions and therefore the free market exchange rate is mainly influenced by recent changes in the political atmosphere, increased hope in Biden’s return to the Joint Comprehensive Plan of Action (JCPOA) and consequently lift of sanctions. On the other hand, the NIMA market is where importers and exporters make decisions based on more certain economic factors rather than hope. Additionally, he stated that there might be some resistance among exporters to supply foreign currency at lower rates. Since they have purchased their raw material at higher exchange rates, selling their currency at the current free market rate results in their loss. However, he expected that if the current free market rate sustains and if the international atmosphere with regards to sanctions alleviates, the NIMA rate also adjusts.
According to the data released by the Statistical Centre of Iran (SCI), consumer prices for goods and services rose by a monthly rate of 1.82 percent, which is the lowest rate since the beginning of this Iranian calendar year. The Consumer Price Index (CPI) for goods rose 1.37 percent, while prices for service rose 2.59 percent. In the goods category the durables prices rose 0.62 percent, the semi-durables prices rose 3.45 percent and the non-durables prices rose 1.26 percent. The monthly inflation rate for food prices slowed, rising 0.77 percent. However, food prices remain nearly 60 percent higher year-on-year.
According to the updated monthly report of the Economic Research Department of Tehran Chambre of Commerce, Industries, Mines and Agriculture (TCCIM), which forecasts this year’s inflation, with an average monthly inflation of between 1 and 4 percent the next two months of 1399, this the annual inflation rate will be somewhere between 35.9 and 37.1 percent, higher than both the World Bank’s and the International Monetary Fund’s forecasts.
Iranian economist, Teymur Rahmani, has stated that based on the long-run relationship between liquidity and an exchange rate dependent on foreign exchange revenues based on the export of natural resources, the USD/IRR exchange rate is fundamentally around IRR 200,000. On his Instagram, he clarified that this does not imply that lower rates are impossible. If external risks are mitigated and oil revenues increase, the exchange rate, which like other prices had experienced overshooting, can sustain at lower rates.
The governor of the Central Bank of Iran (CBI), Abdolnasser Hemmati, stated that the halt of money growth shows that inflation expectations have been controlled. He expressed hope that with alleviated inflation expectations, eased political unrest, and both an increase in oil exports on the one hand, and with some of CBI’s resources being freed on the other hand, markets and prices experience further stability and inflation will continue decrease in the coming months.
FX Rates
Inflation
Iran FX and Inflation Report - Azar 1399 (November 21 - December 20)
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The Iranian calendar month of Azar (November 21 – December 20) saw relative stability in both the NIMA and free market exchange rates. The monthly inflation rate was the lowest in the past six months and a drop in the price of consumer durables contributed to a negative monthly inflation rate for the households in the highest income decile.
The foreign exchange rates in the month of Azar hovered around an average of IRR 256,443 and IRR 258,204 in the NIMA and free markets respectively, making the average spread between the two rates just IRR 1760, the lowest monthly average spread since the adoption of the multiple exchange rate system in 2018. The free market began the period with a rate of IRR 260,500, went to as low as IRR 248,500 in the first week, hit a high of IRR 264,500 in the third week, and ended the period at IRR 257,200. The NIMA rate, on the other hand, began the period at IRR 258,006, went to as high as IRR 260,022, hit a low of IRR 251,176 mid-period, and thereafter in an upward trend ended the period at IRR 258,593. The average daily change in the NIMA rate was around zero and in the free market rate -0.04 percent. The highest spread in this period was IRR 10,122 on December 9, which is still lower than the average spread over the past 12 months.
According to the data released by the Statistical Centre of Iran (SCI), the inflation in the price of goods and services dropped to its lowest rate over the past six months, with a 2.04 percent increase in the general Consumer Price Index (CPI), 0.82 percent in the services CPI and 2.73 percent in the goods CPI. Across different categories of goods, there was a 4.44 percent decrease in the price of durable goods, an increase of 3.73 percent in the price of semi-durables and, an increase of 4.41 percent in the price non-durables.
Inflation in food and healthcare prices also slowed when compared to the prior month. The consumer price index for healthcare rose 1.78 percent. Food inflation rose 4.98 percent. Food inflation remains higher than inflation in the prices of non-food goods, with sustained and significant price increases of 10.3 percent in milk, cheese ,and eggs, 10.4 percent in cooking oil, and 9.7 percent in fruits.
Additionally, there was a price decrease of 3.6 percent in the transportation group, which includes the price of automobiles. These could explain the significant difference between the inflation rates experienced by the highest and lowest income deciles inflations. The weight of food is higher in the consumer basket of lower expenditure deciles while transportation has a larger weight in the basket for higher expenditure deciles.
Writing on Instagram, Iranian economist, Teymur Rahmani, has stated that the easing inflation in the month of Azar shows that high inflation in the Iranian calendar year of 1399 (beginning March 2020) has been mainly driven by inflation expectations stemming from currency depreciation . He observes that there was no significant change in liquidity in the month of Azar, meaning that the lower inflation rate cannot have resulted from changes in liquidity in the short-run.
In their latest monthly report, the Economic Research Department of Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIM) forecasts this year’s inflation, with an assumed average monthly inflation of between 1-4 percent in the next three months of 1399. [AH1] If this assumption holds, annual inflation will be between 35.6 and 38 percent—higher than both the World Bank’s and the International Monetary Fund’s forecasts.
Peyman Ghorbani, Vice Governor for Economic Affairs at the Central Bank of Iran (CBI), explained that the 12-month inflation target set out this May is 22 percent with a 2 percent deviation interval. In recent statements, he highlighted that over the past months many exogenous shocks, including imposition of more sanctions, the pandemic, and the psychological impact of these shocks, impacted the price of goods and services and therefore the inflation rate. He emphasised that the main goal of the CBI is to control inflation and it would use the resources at its disposal, including foreign reserves, to that end.
FX Rates
Inflation
Iran FX and Inflation Report - Aban 1399 (October 22 - November 20)
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The Iranian calendar month of Aban (October 22 – November 20) saw a signification appreciation of the rial in Iran’s foreign exchange market, spurred in part due to the election of Joe Biden and the prospect of new negotiations between the US and Iran. While a strengthening currency saw the monthly inflation rate decrease compared to the previous month, the positive indicators were not universal. Aban also saw the highest monthly inflation in the price of food in over a decade.
While the USD/IRR free market rate trended downward over the course of the month, beginning with a rate of rate of IRR 298,500 and settling at IRR 260,000, the NIMA rate remained relatively stable around an average of IRR 259,600. Both the free market and NIMA rates exhibited volatility around the US election. During this period, for the first time since the adoption of the multiple exchange rate system in 2018, the NIMA rate exceeded that of the free market rate, meaning that the spread between the two rates was negative.
In line with the appreciation of the rial, monthly inflation eased, Data released by the Statistical Center of Iran (SCI) indicates that the general Consumer Price Index (CPI) rose 5.2 percent from the previous month, while prices for goods and services increased 7.60 percent and 1.2 percent respectively. Notably, the CPI for durable goods, which had increased by 22 percent in the month of Mehr, fell by 1 percent.
But the easing of inflation did not extend to the price of food, which rose 13.42 percent from the previous month, the highest one-month increase in a decade. The monthly inflation rate was even higher in rural areas at 14.6 percent, with the prices of meat, cooking oil, and vegetables, rising 17.9 percent, 22.9 percent, and 38.5 percent respectively.
Economist Albert Boghzian of the University of Tehran has suggested that the root of high food inflation in Aban was a lagging impact of exchange rate volatility. While the prices of other goods and services adjusted more quickly to the devaluation of the rial, food products, many of which are subject to price controls set by the government, had not yet adjusted in line with the weakness in the FX market. Moreover, the government has recently cut back on the availability of subsidized foreign exchange for importers, with the higher costs of imported inputs passed onto consumers.
According to the Economic Research Department of Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIM) assuming an average monthly inflation rate of 1-4 percent in the next four months of 1399, the annual inflation rate will settle somewhere between 35 percent and 39 percent, higher than the estimates put forth by the World Bank and International Monetary Fund of 34.1 percent and 30.5 percent respectively.
The SCI has also released the Producer Price Index (PPI) data of the second quarter of the Iranian year 1399, a period that saw the highest quarterly increase in producer price index in several years. General PPI reached 671.7 while PPI for the industry sector reached 805.4 on the back of 37.0 percent increase on the previous quarter—growth that tracked the rise in the USD/IRR NIMA rate.
The Central Bank of Iran (CBI) has continued its efforts to calm the FX market. On November 16, the governor of the central bank, Abdolnasser Hemmati, stated that despite all the sanctions and decrease in oil revenue, USD 21.7 billion of foreign currency has been provided to the markets since the beginning of the year, of which USD 6.7 billion was allocated for the importation of essential goods, while USD 15 billion was provided to the NIMA market to facilitate trade. According to CBI, during the first and second weeks of Aban a daily average of USD 70 million and USD 65 million was supplied in the free market and NIMA markets respectively. In the third week of Aban, buoyed by increased repatriations of foreign currency earnings by exporters, the NIMA market was supplied with a daily average of above USD 140 million.
These interventions and the positive psychological impact of the US election appear to have contributed to the rial strengthening significantly for the first time in over a year. However, some have questioned whether these gains are sustainable. Ferial Mostofi, Vice President of the Investments Committee of the Tehran Chamber of Commerce, expressed skepticism in an interview with Donya-e-Eqtesad. She noted that the structural issues facing Iran’s economy persist and therefore there is no guarantee in the recent stability in the FX markets in the medium-term.
FX Rates
Inflation
Iran FX and Inflation Report - Mehr 1399 (September 22 - October 21)
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The Iranian calendar month of Mehr (September 22 – October 21) was marked by significant volatility in the FX market. The free market and NIMA rates reached historic highs before settling. In the span of one month, the spread between the two rates reached both an all-time high and the lowest level since January 2020. As a result of these fluctuations, the monthly inflation rate reached one of the highest levels in the last decade and the Consumer Price Index (CPI) for durable goods experienced its largest ever monthly increase.
The USD/IRR free market rate formed an asymmetric M-shaped trend, beginning with a rate of IRR 275,500, reaching IRR 300,000 IRR for the first time on October 1, decreasing to a local low of IRR 286000 IRR on October 4, then reaching its all-time peak of IRR 322,000 on October 15, followed by a rapid fall of IRR 47,000 IRR to settle at IRR 275,000 IRR by October 20, ending the month with a rate of IRR 298,000.
Unlike in previous months, the NIMA rate and the free market did not track one-another. Whereas the free market rate ended the month down from its all-time high, the NIMA rate rose to an all-time high of IRR 266,514 on October 20 and remained near that peak. The spread between the two rates rose from IRR 58,0087 at the beginning of the month to record high of IRR 96,711 on October 13. But the concurrent decrease in the free market rate and increase in the NIMA rate in the final days of the month saw the spread shrink to IRR 8,486 on October 2020, before rising again to just under IRR 38,000.
The extreme volatility in the FX market in this period reflects the significant interventions made by the Central Bank of Iran. On October 2, the governor of Iran’s central bank, Abdolnasser Hemmati, announced that USD 8 billion of export revenue had been repatriated to Iran and supplied to the FX market. In mid-October, Central Bank of Iran (CBI) announced that is had begun implementation of new foreign exchange measures. This included a reported 27 percent increase in available FX in the NIMA market on October 12. One day later, CBI announced it had made available USD 78 million of hard currency to the FX market, of which just USD 1.5 million was purchased by banks and exchange bureaus. One week later, on a further USD 60 million of hard currency was made available, but demand only amounted to USD 1.7 million. These interventions in the free market, which coincided with weakening demand, explain the decrease in the free market rate following the October 15 peak.
The latest exchange rate volatility comes after a few months of stabilization in the wider Iranian economy, which is still recovering from the COVID-19 shock. Some Iranian economists are suggesting that the devaluation seen in Shahrivar and Mehr (August 22 – October 22) is therefore comparable to the FX market situation in 2017 and 2018. Economist Ali Sarzaeem pointed to the recovery underway in the job market and in consumption as evidence that the FX market was no longer proving an accurate “thermometer” of the health of the Iranian economy, at least in the short-term.
Whether the CBI’s latest interventions in the FX market prove effective will be of crucial importance as inflation continues to accelerate. According to new data released by the Statistical Center of Iran, general CPI reached 261.5, following monthly inflation of 7.04 percent, the highest single month increase in two years. Year-on-year inflation measured 41.43 percent. Again, the consumer durables are among the goods categories experiencing the highest price increases. The CPI for durable goods reached 577.9, meaning that prices increased 22.38 percent in just one month and are up 136.46 percent over the last year.
Iranian economic commentators are increasingly highlighting that the significant impact of the exchange rate volatility on the prices of durable goods such as consumer appliances or automobiles has become a key challenge facing policymakers as they seek to tame inflation. A policy note on “anti-inflation measures” published in Mehr by the Central Bank of Iran, identifies rising exchange rates as a threat to the bank ability to meet its inflation targeting goals. Increasing he availability of foreign currency for importers is identified as a key priority.
