Abu Dhabi, UAESunday 25 August 2019

Iran inflation to rise to about 40% as sanctions bite and recession deepens

Iran’s economy, which contracted 3.9 per cent in 2018 is estimated to shrink 6 per cent this year, IMF estimates

The Iranian economy is exptected to move deeper into recession this year. AFP 
The Iranian economy is exptected to move deeper into recession this year. AFP 

Iran's economy is expected to slide deeper into recession this year and inflation is set to surge to nearly 40 per cent or more as Tehran struggles to keep its economy afloat in the wake of tighter US sanctions and Washington's goal of curtailing the country’s oil exports to zero, a senior International Monetary Fund official said.

The IMF estimates Iran inflation to rise to 37.2 per cent in 2019 after it climbed to 32.1 per cent last year from 9.6 per cent in 2017. However, the projection for Iran’s consumer prices by the lender, based in Washington, were made before the US State Department announced the end of waivers, said Jihad Azour, director of the Middle East and Central Asia department at the IMF.

The US reimposed sanctions on Iran in November 2018 and said this month it will not renew waivers that were initially granted to eight nations importing Iranian oil when they expire on May 2. Washington threatened to impose sanctions against countries that continue to buy crude from the Islamic Republic. China, India, South Korea and Turkey are among the countries importing Iranian crude.

There is risk that inflation number could rise beyond IMF estimates, depending on “what zero is”, Mr Azour said in reference to the US target of completely halting the crude export capacity of Iran.

Iran’s inflation is the worst among oil-exporting nations of the Middle East, North Africa, Afghanistan and Pakistan region. Only Yemen and Libya trail Tehran, with consumer prices expected to touch 20 and 15 per cent respectively, this year.

Iran’s economy, which contracted 3.9 per cent in 2018, is estimated to move deeper into recession with economic output decelerating to 6 per cent, according to IMF data.

“It is very difficult to say at this time without knowing the level of oil exports [of Iran] to coin a number,” Mr Azour said when asked if the Iranian economy could contract further than the estimated 6 per cent.

Proceeds from the sale of hydrocarbons is the biggest revenue earner for Tehran and US sanctions have denied Iran's government more than $10 billion in revenue, US officials said earlier this month.

Iran’s currency and its banking sector have taken the brunt of US sanctions. Earlier this year Iran’s President Hassan Rouhani said the country faced its biggest economic challenge since the Islamic revolution of 1979.

There is also little hope of progress on Iran's ability to recapitalise and restructure its battered banking sector as bad loans continue to mount, according to Fitch Solutions, a unit of Fitch Group.

The Islamic Republic is likely to devalue the official exchange rate of its currency and may narrow the definition of "basic goods" that qualify for imports at the current rate in 2019, Fitch said in a report earlier this year. The reimposition and further tightening of US sanctions have sharply reduced foreign currency inflows into Iran. The country's currency, the rial, hit record lows last year, losing more than 60 per cent of its value against the US dollar, and the government had to authorise the central bank to intervene in the foreign exchange market in defence of its currency in October.

Iran's official exchange rate for the rial is 42,000 against the dollar versus a free market rate of 110,000 rials against the greenback as of January 1, Fitch said.

Updated: April 30, 2019 12:29 AM

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