IMF sees inflation in Iran breaching 40% by year’s end

IMF sees inflation in Iran breaching 40% by year’s end
Consumer prices are heading north in Iran. A street in the city of Qom, 140 km south of Tehran.
By bne IntelliNews November 14, 2018

The International Monetary Fund (IMF) has predicted that inflation in Iran will leap to over 40% by the end of this year.

In a report on Middle Eastern economies published on November 13, the IMF also repeated a previous forecast released in its latest World Economic Outlook on October 8 that the ultra-aggressive US sanctions regime would push Iran's economic output down by 1.5% this year and 3.6% next year.

"This [recession] largely reflects the expected impact of the reimposition of US sanctions on Iran, which is likely to reduce Iranian oil production and exports significantly over the next two years at least," the IMF said.

Various data from official statisticians show Iran’s inflation rate is running just north of 30% y/y.

Iran's economy expanded by 12.5% in 2016 after global sanctions were removed under the Islamic Republic’s 2015 nuclear deal with six major powers (including the US which unilaterally walked out of the accord in early May this year). The country’s GDP expansion was measured at a much less impressive 3.7% last year after Donald Trump came to power and showed immediate hostility to Iran, thereby reversing a lot of previously positive investor sentiment on its economic prospects.

Need to align exchange rates
In the new report, the IMF's Middle East director, Jihad Azour, said one of the most urgent issues facing Iran as it deals with the consequences of the Trump administration’s sanctions was the need to align the official currency-exchange rates for the Iranian rial with black market rates. On the unofficial market, the Iranian rial (IRR) is weaker by towards 70% against the dollar in the year to date.

Some academics outside of Iran such as economist Steve Hanke at Baltimore-based Johns Hopkins University take issue with the official inflation figures given out by the Iranian central bank and contend that realistic calculations show that the Iranians are already suffering runaway inflation. On November 14, Hanke calculated that Iran’s annual inflation rate stood at 236%. His calculations use the black market rial rates, although some critics of his approach question the reliability of the unofficial data he is relying on.

Surging real estate prices
Separately, statisticians are taking note of surging inflation in Iran’s real estate prices. The latest Central Bank of Iran (CBI) figures show Iranian real estate prices hit 83.5% y/y in October.

House prices in Tehran are now based on the benchmark of Iranian rial (IRR) 86,100,000 per square metre of built-in area or $575 per sqm at the open market exchange rate (sellers often cannot receive cheap dollars based on the government’s official exchange rate so these figures are more pertinent).

The real estate price hikes have coincided with a huge drop in transactions. In Tehran, sales fell by more than 32% over the past month, pointing to an ongoing recession in the property sector.

The phenomenon of less sales but higher prices stems from the severe devaluation of the IRR. As reported by Radio Farda, the Persian-language service of RFE/RL, many Iranians now think of the price of a house, and effectively everything else, in terms of US dollars. Those few who can invest in real estate in the midst of an economic crisis, real estate is the safest bet and for those willing to sell, the price has to be higher to account for at least part of the currency devaluation.

CBI data also shows that average rental fees in urban areas in Iran grew by 12.6% y/y over the past month, with the rise in Tehran measured at 15%.

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