Iran FX and Inflation Report - Mehr 1399 (September 22 - October 21)
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The Iranian calendar month of Mehr (September 22 – October 21) was marked by significant volatility in the FX market. The free market and NIMA rates reached historic highs before settling. In the span of one month, the spread between the two rates reached both an all-time high and the lowest level since January 2020. As a result of these fluctuations, the monthly inflation rate reached one of the highest levels in the last decade and the Consumer Price Index (CPI) for durable goods experienced its largest ever monthly increase.
The USD/IRR free market rate formed an asymmetric M-shaped trend, beginning with a rate of IRR 275,500, reaching IRR 300,000 IRR for the first time on October 1, decreasing to a local low of IRR 286000 IRR on October 4, then reaching its all-time peak of IRR 322,000 on October 15, followed by a rapid fall of IRR 47,000 IRR to settle at IRR 275,000 IRR by October 20, ending the month with a rate of IRR 298,000.
Unlike in previous months, the NIMA rate and the free market did not track one-another. Whereas the free market rate ended the month down from its all-time high, the NIMA rate rose to an all-time high of IRR 266,514 on October 20 and remained near that peak. The spread between the two rates rose from IRR 58,0087 at the beginning of the month to record high of IRR 96,711 on October 13. But the concurrent decrease in the free market rate and increase in the NIMA rate in the final days of the month saw the spread shrink to IRR 8,486 on October 2020, before rising again to just under IRR 38,000.
The extreme volatility in the FX market in this period reflects the significant interventions made by the Central Bank of Iran. On October 2, the governor of Iran’s central bank, Abdolnasser Hemmati, announced that USD 8 billion of export revenue had been repatriated to Iran and supplied to the FX market. In mid-October, Central Bank of Iran (CBI) announced that is had begun implementation of new foreign exchange measures. This included a reported 27 percent increase in available FX in the NIMA market on October 12. One day later, CBI announced it had made available USD 78 million of hard currency to the FX market, of which just USD 1.5 million was purchased by banks and exchange bureaus. One week later, on a further USD 60 million of hard currency was made available, but demand only amounted to USD 1.7 million. These interventions in the free market, which coincided with weakening demand, explain the decrease in the free market rate following the October 15 peak.
The latest exchange rate volatility comes after a few months of stabilization in the wider Iranian economy, which is still recovering from the COVID-19 shock. Some Iranian economists are suggesting that the devaluation seen in Shahrivar and Mehr (August 22 – October 22) is therefore comparable to the FX market situation in 2017 and 2018. Economist Ali Sarzaeem pointed to the recovery underway in the job market and in consumption as evidence that the FX market was no longer proving an accurate “thermometer” of the health of the Iranian economy, at least in the short-term.
Whether the CBI’s latest interventions in the FX market prove effective will be of crucial importance as inflation continues to accelerate. According to new data released by the Statistical Center of Iran, general CPI reached 261.5, following monthly inflation of 7.04 percent, the highest single month increase in two years. Year-on-year inflation measured 41.43 percent. Again, the consumer durables are among the goods categories experiencing the highest price increases. The CPI for durable goods reached 577.9, meaning that prices increased 22.38 percent in just one month and are up 136.46 percent over the last year.
Iranian economic commentators are increasingly highlighting that the significant impact of the exchange rate volatility on the prices of durable goods such as consumer appliances or automobiles has become a key challenge facing policymakers as they seek to tame inflation. A policy note on “anti-inflation measures” published in Mehr by the Central Bank of Iran, identifies rising exchange rates as a threat to the bank ability to meet its inflation targeting goals. Increasing he availability of foreign currency for importers is identified as a key priority.
