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.
