Iran FX and Inflation Report - Mordad 1400 (July 23 – August 22)
New lockdowns were imposed during the Iranian calendar month of Mordad 1400 (July 23 – August 22, 2021) to slow the spread of COVID-19, meaning that there were interruptions in the foreign exchange market. Still, despite exchange bureaus being closed for stretches, the rial continued to weaken, with the free-market exchange rate hitting its highest level so far this year. Analysts believe the deteriorating situation in Afghanistan, an important source of hard currency for Iran, is only partly to blame.
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In the foreign exchange market, the free-market rate began the period at IRR 251,000, rose by an average daily rate of 0.72 percent, and reached IRR 275,000 by the end of the period, which is the highest level since November 2020. The NIMA rate started the period at IRR 223,681, grew by an average daily rate of 0.17 percent, and ended the period at IRR 230,084.
According to data released by the Statistical Center of Iran, consumer price index (CPI) rose to 337.8. The monthly inflation rate was 3.18 percent and the 12-month inflation rate reached a record high of 45.2 percent. The point-to-point inflation rate was 43.2 percent, indicating that households spent 43.2 percent more on the same basket of goods and services compared with the same month in the previous year. Goods prices rose at a monthly rate of 3.91 percent. Durable goods experienced their highest monthly inflation since October 2020 with a price growth of 4.26 percent. Price of non-durable goods rose by 4.04 percent and semi-durable goods by 2.64 percent.
Various reports suggest that Taliban’s ascendency during the Iranian calendar month of Mordad, beginning with the takeover of Herat, may have made a minor contribution to the rising exchange rate. In an interview, economist Hamidreza Jeyhani explained that Dubai, Soleymaniyeh, Herat, and Istanbul have a critical role in determining the exchange rate in the free market as they are sources of hard currency for exchange bureaus in Iran. Given the situation in Herat, exchange bureaus need to find another way of sourcing hard currency and this has increased costs and hence the exchange rate, at least somewhat. Analyst Kambiz Afsari, in an interview with Tejarat News, noted that there has been increased demand for foreign currency in Iran in recent weeks, and the upward trend in the exchange rate has not been solely due to the situation in Afghanistan.
Economist Teymour Rahmani attributed the rial’s recent slide to negative sentiments that began to emerge in the Spring. Increased demand for hard currency and increased liquidity are combining to create upward pressure on inflation and exchange rates. On inflationary expectations, he shared that the current inflationary expectations are fundamental due to the consequences of shortcomings regarding the government’s foreign currency revenue, which all lead to printing money and increasing liquidity. Also, due to lack of supply of foreign currency, imports have fallen and there’s a gap between demand and supply of goods, which also results in inflation. Therefore, he believes adjustments in inflationary expectations will require fundamental changes such as lifting sanctions and contractionary policies.
Economists at the Monetary and Banking Research Institute (MBRI) of Iran’s central bank also highlighted a connection between reduced production at export-oriented firms and the exchange rate. In managing electricity supply, the government opted to prioritise households, leaving factories in the dark for hours. Reduced output related to the power cuts has contributed to both goods inflation and likely reduced total export volumes, creating a supply pressure in the foreign exchange market.
FX Rates
Inflation
Iran FX and Inflation Report - Tir 1400 (June 22 – July 22)
Inflation rose in the Iranian calendar month of Khordad 1400 (June 22 – July 22 2021), driven in part by the appreciation of the dollar and a sharp increase in the cost of healthcare. The annual inflation rate reached a record-high 44.2 percent.
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In the FX market, the free-market rate began the period at IRR 243,000, reached a peak of IRR 253,000, then began a downward trend and ended the period at IRR 245,300. Meanwhile, the NIMA rate rose, beginning the month at IRR 209,645 and ending at IRR 224,022.
According to the data released by the Statistical Center of Iran, the consumer price index (CPI) rose to 327.4, marking a monthly inflation rate of 3.54 percent, which is the first time in the last 8 months that monthly inflation has exceeded 3 percent. Services experienced registered higher price increases than goods, with an monthly inflation rate of 4.38 percent compared to goods inflation of 3.08 percent. Under the goods category, durable goods had the highest price increase, with a monthly inflation of 3.68 percent, while the price increase in semi-durables and non-durables was 2.94 percent and 2.96 respectively. Food prices rose by the percent as in the previous month, with a slight decrease in food inflation in urban areas and slight increase in monthly food inflation in rural areas. Perhaps reflecting increased demand for health services due to the increase in COVID-19 cases in Iran, prices in the health category rose 6.29 percent, the largest monthly increase in the past 9 months. The increase in urban areas was higher than in rural areas.
A new report issued by the Ministry of Cooperatives, Labour and Social Welfare (MCLSW) analyses the inflationary environment in Iran. The report idenfities four factors that have been the main contributors to inflation. These include (1) increased liquidity, (2) the higher exchange rate, (3) inflationary expectations, which spur “fake” inflation, and (4) supply chain shocks related to the COVID-19 pandemic effecting supply and demand of certain goods. The report also includes an forecast for the 12-month inflation rate at the end of the Iranian calendar year, which concludes in March 2022. The report authors expect inflation to begin to subside, with annual inflation reaching 29.8 by the end of the period.
According to the Central Bank of Iran (CBI), during the first four months of the year 1400 USD 15 billion in foreign currency has been allocated for the importation of emergency and essential goods. During this 4-month period, the equivalent of USD 4 billion was sold in the NIMA system at the weighted average rate of IRR 218,000.
The Iranian calendar month of Tir marked the final month before the Raisi administration took office. Given the promises made by President Raisi over the course of his campaign as well as the existing fiscal deficit, Masoud Nili, a veteran economic policymaker, warned the new administration of that runaway inflation remains a major risk and urged the new administration to consider the inflationary impacts of every decision.
FX Rates
Inflation
Iran FX and Inflation Report - Khordad 1400 (May 21 – June 21)
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The highlight of the Iranian calendar month of Khordad (May 22 – June 21) was the Iranian presidential elections and political uncertainty had a clear influence on the exchange rate. The Consumer Price Index (CPI) rose at a faster monthly pace of 2.53 percent—a level sufficient to push the annual inflation rate to 43 percent, the highest level in 25-years. An increase in the price of food and beverages was a key contributor to inflation.
In the FX market, the free market exchange rate rose over the course of the month, starting at a rate of IRR 229,600, reaching a high of IRR 244,500, and ending the period at IRR 241,300. In the NIMA market, the average monthly rate was IRR 205,444 and the peak rate was IRR 211,177. The spread between the two rates was IRR 31,094 at the end of the month.
CPI reached 316.2 in the month of Khordad, putting monthly inflation at 2.53 percent. Good prices rose 2.99 percent compared to last month, including 3.08 percent increase in the price of durables, 3.49 percent in semi-durables, and 2.91 percent in non-durable goods. The price of services rose by 1.75 percent. National food inflation rose significantly and reached 3.18 percent, with inflation of 3.24 percent in urban areas and 2.92 percent in rural areas. The rise in the price of food and beverages contributed greatly to the monthly inflation. The price increase in health services was 2.70 percent—2.66 percent in urban areas and 2.71 percent in rural areas.
Price stickiness may be factor into inflation. Mohammad Hossein Eslamian, Vice President of the Home Appliances Union, said that due to reduced purchasing power and weak demand manufacturers have been reluctant to increase prices for home appliances. Ali Rabii, spokesperson for the Rouhani administration, also touched on price stickiness in a recent briefing. While optimistically suggesting that the exchange rate will stabilise between IRR 110,000 and 170,000, Rabii suggested that it will take time for any appreciation in the value of the rial to be reflected in good prices.
But some economic analysts have warned that even if the nuclear deal is restored, the expected rally in the value of the rial might not materialise. Majid Shakeri, an economic analyst, explained that even though sanctions relief will reduce supply-side pressure on the exchange rate, the unmet demand for imports which has accumulated over the past three years, will create demand-side pressure that could see the value of the currency remain around the current levels.
Looking forward to a new presidential administration in Iran, economists widely agree that tackling inflation is a key priority of economic policy, just as it was for the Rouhani administration in 2013. Economist Amir Kermani has warned that the exchange rate could increase to IRR 400,000 if the government does not stem the increase in the money supply—money is being printed in part to address the fiscal deficit.
The foreign policy of the new administration will also have a strong impact on the exchange rate and, in turn, inflation. Concerns that the Raisi administration has not been full-throated in its support of the JCPOA have seen the rial shed some of its recent gains. Ali Akbar Nikoo Eghbal, an economist, outlined two scenarios for inflation. In the first scenario, the JCPOA is restored with the US as a full party, meaning that sanctions are lifted and likely that Iran comes into minimum compliance with the FATF action plan. In this scenario, Iran would experience an annual inflation rate of 20 percent. In the second scenario, where there is no restoration of the JPCOA and no sanctions relief, Iran would experience an inflation rate of up to 50 percent. The uncertainty is already leading to a change in behaviour in Iran’s FX market. Traders bearish on the rial are less willing to sell dollars at current prices as they expect the value of the rial to fall further. But buyers are also reluctant to buy FX at current prices because a JCPOA breakthrough could see the transactions become less expensive. Transaction volumes in the FX market have declined.
FX Rates
Inflation
Iran FX and Inflation Report - Ordibehesht 1400 (April 21 – May 21)
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The Iranian calendar month of Ordibehesht (April 21 – May 21) continued the trend of lower inflation, aided by a decrease in the NIMA exchange rate. In the FX market, the free market and the NIMA exchange rates began the period with rates of IRR 242,600 and 232,288 IRR respectively. Over the first half of the month both rates declined, reaching lows of IRR 209,000 and 204,513 mid-period. The NIMA rate stayed below IRR 210,000 and ended the period at IRR 205,474. However, the free market rate rose to IRR 232,000 and ended the period at IRR 230,000. The spread between the two rates in the month of Ordibehesht began at IRR 10,312, reached a low of IRR -6,258 and ended the period at IRR 24,526, roughly twice the spread registered at the end of the previous Iranian calendar month.
The monthly increase in the Consumer Price Index (CPI) decreased to 0.75 percent in the month of Ordibehesht with CPI reaching 308.4. The price of goods increased 0.21 percent and while the price of services rose 1.64 percent. There was a decrease of 0.14 percent in the CPI of non-durable goods. Meanwhile, durables CPI rose 0.3 percent and semi-durables CPI rose 2.53 percent. The price of food declined 1.17 percent nationally—the first decrease in 16 months—but there was an increase of 2.31 percent in the price of healthcare.
As the rial continued to gain value against the dollar, Iran economists are questioning whether the trend is sustainable. Gholamali Farjadi an economic professor, believes that the rial is appreciating in part because consumer demand for imported goods remains depressed and that the floor for the dollar exchange rate is IRR 150,000. Ali Ghanbari, a deputy minister of agricultural, believes the floor of the dollar price is around IRR 190,000, noting that Iranian exporters will not want the rial to appreciate further, hampering the cost competitiveness of their products.
Abdolnasser Hemmati, until recently Iran’s central bank governor and now presidential candidate, cited positive expectations with regards to sanctions relief and the assumption that the central bank will have greater access to its foreign exchange reserves as a primary reason why the rial was appreciating against the dollar.
FX Rates
Inflation
Iran FX and Inflation Report - Farvadrin 1400 (March 21 – April 20)
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The Iranian calendar month of Farvardin (March 21 – April 20), which marked the beginning of the year 1400, saw relatively steady trends in the FX market. While the free market rate saw a small decline, the NIMA rate rose slightly, leading to reduction in the spread between the two rates. In the goods and services market, the monthly inflation rate rose compared to the previous month.
As the period coincided with Iranian New Year holidays, the available data for the FX market does not cover the whole period. But overall, the free market rate started at slightly above IRR 250,000, rose as high as IRR 259,000, and ended the period at IRR 242,000, making a relatively steady trend with a minor negative slope. On the other hand, the NIMA rate began the period at slightly below IRR 230,000, reached as low as IRR 226,199, and finished at IRR 232,903. As a result of the two trends moving in opposite directions, the spread between the two rates went from a high of IRR 32,766 to IRR 9,097 at the end of the period.
According to the data released by the Statistical Centre of Iran (SCI), the country’s general Consumer Price Index (CPI) reached 306.1 in the month of Farvardin, making the monthly inflation rate 2.68 percent. There was a 2.64 percent increase in the price of goods, 2.78 percent in services, 1.88 percent in durables, 2.81 percent in semi-durables and 2.78 percent in non-durables. The inflation rates of the food and health categories were higher than the overall monthly inflation at 2.89 percent and 3.57 percent respectively.
Vahid Shaghaghi Shahri an economic analyst, forecasts a decline in the inflation in the year of 1400, expected annual inflation to fall to 22 percent as a result of reduced economic uncertainty, inflationary expectations, deepened depression and reduction in consumption demand. Another Iranian economist, Davoud Soori, explains that inflation in 1400 will correspond to the substantial fiscal deficit. On the exchange rate, despite speculation that the government is supporting the rate at the current level, Soori believes the current exchange rate reflects the real facts in the economy. Despite the prospects for sanctions relief and the possibility of the Central Bank’s foreign reserves being freed, Soori does not expect the rial to appreciate significantly as Iran will continue to struggle to access its reserves.
