Iran is facing a perfect storm involving a severe currency devaluation amid tightening sanctions levied by the US and stagnating wages. Many Iranians have cut down to essential purchases only, but prices have nevertheless continued to jump across the country. Rural areas are more heavily affected than urban localities.
Some international economists put Iran’s inflation rate a good deal higher than what is portrayed by the country’s official statisticians.
Iran’s economy is expected to shrink for a second consecutive year in 2019 while the country’s consumer price index (CPI) inflation could hit 50% for the year, the International Monetary Fund (IMF) said in late April.
The US from the start of May stepped up its attempt to throttle the Iranian economy to force concessions on Tehran’s approach to Middle East affairs by launching a strategy aimed at trying to force Iran’s crude oil exports to zero. Last year’s reintroduction of sanctions against Iran pushed the Iranians back into recession, with growth contracting by 3.9% in 2018, IMF estimates suggest. The Fund now sees Iran on course for at least a 6% decline in GDP in 2019. However, that calculation was formulated before the US announced it was looking to wipe out Iran’s oil exports.
The re-imposition of heavy sanctions on November 5 and the removal of the waivers that allowed some countries to temporarily continue importing Iranian oil without fear of US sanctions will have an additional negative impact on the Iranian economy both in terms of growth and in terms of inflation.
On May 27 during an official visit to Japan, US President Donald Trump welcomed the prospect of Japanese Prime Minister Shinzo Abe’s assistance in dealing with Iran, after Japanese broadcaster NHK reported that Abe was considering a trip to Tehran as early as mid-June.
While claiming he has no intention of going to war with Iran, Trump is engaged in what the US describes as a “maximum pressure campaign”, and what Tehran describes as an “economic war”, to strangle the Iranian economy with sanctions. Iran has said it has no intention of entering into talks with the US while the sanctions, which it says are first and foremost hitting ordinary people, remain in effect.
China, meanwhile, reiterated that it opposed unilateral US sanctions. Iranian Foreign Minister Javad Zarif is trying to persuade the Chinese, the number one importers of Iranian oil, not to heed Washington’s demand. India's government is likely to resume taking Iranian oil exports. Iranian efforts to export as much oil as possible through hidden grey market means continue.
Iran should work to eliminate the gap that currently exists between the Iranian rial (IRR) market exchange rates and official exchange rate, according to the IMF, which will help tame and control inflation and reduce pressure on the exchange rate. The IRR is around two-thirds weaker against the dollar on the unofficial market compared to where it stood before it became clear early last year that the US was switching its Iran policy back to a sanctions-led approach. The Central Bank of Iran (CBI) is in the midst of addressing this task, according to CBI governor Abdul Nasser Hemmati.
President Recep Tayyip Erdogan did it again. On September 23, Turkey shocked with a 100bp rate cut. More cuts are awaited despite booming (even official) inflation and global inflationary period.
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