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.
