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.
