Iran seeks relief from inflation and FX shortages

Pexels/Arian Malek Khosravi

• Rial loses value against dollar
• Rising prices hit citizens
• Iran benefits from Ukraine war

The transfer of $6 billion in funds frozen by the US cannot come soon enough for Iran’s hard-pressed citizens. 

As part of an agreement last month for the release of American-Iranian prisoners, President Biden’s administration has agreed to the release of the foreign exchange which had been blocked in South Korea. 

Rising prices are at the core of Iranians’ current travails.

In 2017, before Donald Trump took the US out of the Joint Collective Plan of Action nuclear deal, inflation was 7 percent. But, following Trump’s imposition of a maximum pressure policy, it surged to 27 percent in 2018 and 47 percent in 2022, according to the Central Bank of Iran (CBI). In response the CBI printed rials.

As a result, according to the World Bank, GDP fell from $487 billion in 2017 to $240 billion in 2020, and oil exports fell from an average of 2.13 million barrels per day (b/d) to 370,000 b/d, according to Kpler, a data analytics company.

The impairment to foreign exchange earnings was exacerbated with the onset of the Covid pandemic. 

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In July the Iranian parliament’s Research Centre reported that the poverty rate had increased from 19 percent to 30 percent over the past decade. More than 26 million people in a population of 88 million are living below the poverty level.  

The level, defined by the Centre, is set at 30 million rials a month for a household of four – roughly equivalent to 5 dollars per person per day. 

The average consumption of red meat decreased by 41 percent in 2021 compared to 1990, and the consumption of chicken also fell 5 percent in the same period, the Centre reported. Such foods are luxuries for many Iranians.

The government-approved minimum wage in 2023 is slightly above $100 per month. Yet data from Iran’s Statistical Centre at the beginning of 2023 show that the average housing price in Tehran is over $1,200 per square metre.  

The situation is not any better in other consumer sectors. To purchase the cheapest, low-quality Iranian-made car, an Iranian worker must pay over $7,000, equivalent to six years’ income. 

The heavily sanctioned Islamic Republic has however been a beneficiary of the Ukraine war. As Russia has struggled to sell crude oil on the international market, Iran has stepped up and increased exports to China.

According to Bloomberg, citing Kpler, Iran will have exported 1.5 million b/d of crude oil to China in August, the highest since 2013.

Iran has also joined the Brics group of developing countries which opens the possibility of improved payment and settlement in currencies other than the dollar.

Mohsen Khojastehmehr, the chief of the National Iranian Oil Company, said last month that Iranian production would hit 3.5 million b/d by mid to late September from 3.1 million b/d currently, according to the Tasnim news agency.

While Iran is a founder member of Opec it has an exemption when it comes to taking the kind of production cuts made by Saudi Arabia. 

And, according to the IMF cited on Tasnim, Iran’s foreign exchange reserves rose sharply to $41 billion in 2022.

Ordinary Iranians are hoping that the authorities can bring some coherence to the foreign exchange market – where three rates are in operation.

Since the US withdrawal from the Joint Comprehensive Plan of Action, the Iranian Rial has lost more than 80 percent of its value against the dollar, according to Bonbast, a foreign exchange website. 

Iran’s black market foreign exchange remains largely focused on the triumvirate of the dollar, euro, and UAE dirham. Iranian merchants use Renminbi remittances to fund $16 billion in imports of goods from China.

The Ministry of Economy and the CBI adopted a multi-rate dollar policy to control the market and also to support sensitive sectors of the economy such as food production.

While each US dollar sells for 490,000 rials in Tehran’s open market, the bank rate is around 410,000 rials and the so-called government remittance rate is 280,000 rials. The latter is a special rate for buying food, medicine and other essential goods.

In February the rial hit a low of 526,500 in the open market, according to Bonbast. 

The Central Bank under Mohammad Reza Farzin, the governor who was appointed in December, is engaged in a campaign against officially licenced foreign exchange dealers to ensure that they comply with these rates.

In July and again earlier this month the Central Bank cancelled the general assembly of the foreign exchange dealers association in apparent exasperation at non-compliance.

For their part, the FX dealers are concerned that they will lose their livelihoods as customers go elsewhere to obtain better black market rates.