Published: July 10th, 2020
Iran’s year of cascading economic and humanitarian woes has taken a new turn. The rial is plunging against the US dollar, making life more expensive and testing the country's ability to keep its sputtering economy from spiralling into full-blown depression.
As Tehran struggles to prop-up an economy battered by lack of access to medicines and PPE, crippling US sanctions are taking a toll on the national currency.
According to Bonbast.com, this week one greenback was fetching up to 215,000 rials, in stark contrast to the official rate of 42,000.
The rial’s extended plunge has already forced the central bank to take action, injecting hundreds of millions of dollars in liquidity designed to stabilise the rial, a move the central bank described as ‘prudent and targeted’.
The bank says it has enough foreign reserves to draw from for the foreseeable future but won’t disclose the actual amount.
If current trends continue, the fiscal deficits brought on by the economic crisis could force the government to dig into those reserves, further degrading Iran’s capacity to control rampant inflation.
Commenting on the rial this week, economists at the Institute of International Finance said Iran’s foreign exchange reserves are limited, and any amount they can inject in the market won’t stop further depreciation, particularly against the of US sanctions and ongoing isolation from the West.
After the Trump administration’s withdrawal in 2018 from Iran’s 2015 nuclear pact, and the re-imposition of sanctions, the rial has lost about 70 per cent of its value
Tehran has tried to address the loss by creating several foreign exchange rates, in hopes of taking some of the financial burden off the country’s importers. But in the unregulated cash economy, the rial has kept plunging, unabated even after the central bank’s most recent intervention.
Some of the fall is sentiment-driven, exacerbated by the government’s recent refusal to let UN nuclear inspectors access its two suspected nuclear weapon development sites. The broader economic deterioration brought on by COVID-19 is also dragging down expectations for the economy.
Economists have also suggested the country’s economy is undergoing a more fundamental shift with the collapse in oil export revenues brought on by sanctions moving its current account from traditional surplus to a small deficit this year.
Analysts believe the central bank has enough reserves to support the rial. Still, its stocks of foreign cash are getting smaller, as they are also being used to finance Tehran’s budget deficit.
Gouged by American trade and diplomatic sanctions, Iran’s oil exports are expected to average between 100,000 to 200,000 BPD this year. That's down from the more than 2.5 million BPD shipped before the re-imposition of sanctions in April 2018.
The IMF thinks Iran will use up more than $20 billion of its reserves this year, taking the total down to a bit more than $85 billion. Another $16 billion in foreign currency reserves is expected to be drawn down in 2021.
The government’s budget deficit is expected to reach north of $10 billion by mid-year. The chief of Tehran’s Chamber of Commerce recently said that the expanding budget deficit, combined with a pinch on money supply would create a weaker rial, spur inflation, and lead to less purchasing power for importers and ordinary Iranians.
The government is asking citizens to keep a steady nerve and not seek refuge in purchases of foreign currency. After an initial rush to buy greenbacks when the dollar started to gain value against the rial, demand for dollars has begun to calm. Observers have also noted that traders in central Tehran currency exchange businesses have been refusing to sell dollars, perhaps under threat of punitive action by lawmakers and regulators.
With the sanctions and pandemic lockdowns stifling both the economy and disposable income, escaping hardship is becoming a daily challenge across the country. From ordinary workers on factory floors to senior managers in corner offices, everyone is feeling the pinch of a currency edging closer to free-fall.
With taxes going up, subsidies going down, the available foreign markets for Iranian goods and services choked off by American sanctions, and difficulty getting hold of the foreign currency needed to engage in international trade, a growing number of businesses say they’re facing practical barriers that hit their revenues hard.
A poisonous blend of pandemic-induced slowdown, trade sanctions, and looming currency crisis is pushing many firms into a state of paralysis. Another problem building in the background is a shortage of raw materials for some manufacturing verticals.
In Tehran’s bustling markets, prices for essential household products like rice, bread, and meat are rising each day. Meat is becoming an unaffordable luxury for many households, with average prices above $10 per kilo and rising. Reports in Iranian media about increasing layoffs and strikes by workers who haven’t been paid for months are on the rise, even when workers in government-owned businesses take industrial action.
As day-to-day living becomes more expensive while salaries hold firm and spending power declines, ordinary Iranians are struggling to make ends meet. The country's misery index rises with each passing day.
More bad news is on the horizon. The International Monetary Fund is forecasting Iranian inflation to rise above 34 per cent by the end of 2020. The IMF says openly that Iranians need to prepare themselves for further price rises and hardship
Eager to prevent a reply of the country-wide unrest seen in late 2019, Iran’s clerical rulers will be considering all options to keep the ship of state on course. Last year’s protests were prompted by economic hardship but quickly turned political with demands by protestors for the country’s leadership to step aside.