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.
