Iran’s currency crisis: what the rial does (and does not) tell us
The recent nationwide protests in Iran are the result of an accumulation of grievances, increasingly focused on what is commonly described as the “loss of value of the national currency.” This phrase is a familiar everyday lament among Iranians, who often equate the value of the rial—measured in U.S. dollars—with living standards. In doing so, they typically focus on the free-market exchange rate. Although this is a narrow market, it produces the most dramatic signal. The bulk of foreign exchange transactions take place at lower rates, but access to them is limited. The free-market rate, now around 1.3 million rials per dollar and averaging just under one million in the past month (see the blue line in Figure 1, left axis), is roughly 100 times its level when Obama-era sanctions took effect in late 2011.
(more…)The real depreciation of the rial under sanctions
In my previous post I argued that sanctions and the multiple devaluations they have caused have increased the competitiveness of the Iranian economy. This means that inflation did not increase enough to undo a series of devaluations since 2011, so that the rial is cheaper in real terms, not just nominal terms. If this is the case, removal of financial sanctions confer important benefits on Iran, perhaps exceeding that of the release of frozen funds or more oil sales to China. Below I present the evidence of rial’s devaluation in real terms and leave the question of its potential for growth of non-oil exports to another time.
(more…)Is Iran’s inflation moderating?
Note: A hiccup on the WordPress.com site caused this post to be removed after it was published on August 29. I am reposting it here with minor edits.
After some delay, the Statistical Center of Iran (SCI) has published its inflation report for the Iranian month of Mordad that ended on August 20. The report shows that prices were rising faster than in recent months, at 45.3% annual rate compared to an average of 27% for the preceding two months. The report undermines government hopes that inflation might come down to “around 30%” by the year’s end, a goal that the new Central Bank governor, Mohammad Reza Farzin, has been communicating to reporters. He has put inflation control as his main focus.
(more…)Delay and discrepancy in Iran’s inflation data
For the past several years, on the first day of each month the Statistical Center of Iran (SCI) has published the inflation report for the previous month. But, this month, the report for the first Iranian month of the new Iranian year 1402 (Esfand, which ended on 20 March 2023) is yet to be posted. The official explanation is that SCI is in the process of changing the base year for the CPI from 1395 (2016) to 1400 (2021). Five-year updates are normal and necessary because the expenditure weights used to calculate the CPI change over time. Presumably they are being recalculated using the household budget survey for 1400, which was concluded a year ago. Has there not been enough time to estimate the new weights?
(more…)More dire predictions of economic collapse in Iran from the Wall Street Journal
An angry and dystopian op-ed about Iran, published in the Wall Street Journal on March 1, committed several errors in judging Iran’s economic performance that would fail my undergraduates economic students. They are taught to never fall prey to the vagaries of exchange rate fluctuations in developing countries when making international comparisons of living standards. For example, if the value of a country’s currency drops suddenly, its GDP measured in US dollars doesn’t collapse immediately — it may even go up. Since the 1960s, millions of dollars has gone into research to make data available for international comparisons. These are widely available on the World Bank data bank site and from the Penn World Tables, where the International Comparison Project originated. I have previously written about international comparisons of living standards here and here in this blog and elsewhere. There is therefore no more excuse for picking bad data from the internet to write bad op-eds. (more…)
Rising employment since Trump’s sanctions may not last
Earlier this month the Statistical Center of Iran (SCI) released the results of the latest quarterly labor force survey, which show employment continued to expand during fall 2019 (the third quarter of the Iranian year 1398). The data question the dire accounts of Iran’s economy that have appeared in western media, a point that I raised in a recent post in Project Syndicate and again this week in ResponsibleStatecraft.org (which has replaced Lobelog.com). However, there are reasons to believe that this positive trend is short-lived, that as excess capacity is used up and new investments fail to materialize, the economy takes a turn for the worse. Below, after presenting the new data, I discuss several challenges to employment if sanctions continue. Some of these challenges can be overcome by domestic reform, such as banking reform to enable the flow of credit to producers, but others are not under the control of the government, such as moving money internationally. (more…)
Rising employment casts doubt on IMF’s grim forecast for Iran’s economy
In October, the IMF downgraded its forecast of Iran’s economic growth for 2019 from -6 to -9.5 percent. The adjustment brought the IMF’s assessment of Iran’s economic performance closer to that of the World Bank (-8.7 percent) and is revising opinion regarding the ineffectiveness of sanctions in forcing Iran to renegotiate the 2015 nuclear deal. It has strengthened the hand of Iran foes who argue that sanctions are about to bear fruit and urge the Trump administration to stay the course and ignore appeals from Europeans to ease pressure on Iran.
The Financial Times, quoting an unnamed Iranian economist, added alarm to the downgrading by suggesting that Iran’s situation may be worse than it was during the Iran-Iraq war or the Anglo-Soviet occupation of Iran during World War 2. The idea that life in Iran is anything like the 1940s or the 1980s is nonsense, and the FT reporter who files her reports from Tehran can (but did not) attest to that. It is easy to dismiss this comparison as silly, but the dire predictions of sharp contraction by IMF and the World Bank for the year should be taken seriously. And by seriously I mean to ask why they are at odds with new employment data from Iran. (more…)
Good news for Iran from the inflation front
Good economic news greets President Rouhani as he arrives in New York for the UN General Assembly this week: a declining trend of inflation. According to the latest consumer price index data published by the Statistical Center of Iran, during the Iranian month of Shahrivar (August 21-September20, 2019) inflation reached its lowest level since Trump’s assault on Iran’s economy began 18 months ago: the CPI increased at an annual rate of just 6.1 percent. When Trump reimposed sanctions in May 2018, inflation was quite low: 2.7 percent annually in March 2018 and rose to 126.7 percent in October. It has declined more or less continuously from that peak since (see graph of the 3-month moving average below). (more…)
Can Iran’s economy restructure to minimize the impact of sanctions?
In a post published on Lobelog.com today, I ask if Iran’s economy is sliding. Available data do not allow me to answer this question one way or the other, but they do undermine the claim of doomsayers that the economy is on the verge of collapse.
A lot rides on the answer to this question, however, and I do not have more to say on it here. There is no doubt that in the standoff between Iran and the US, time is on the US side. They can wait this out for a very long time, at least as long as Iran keeps to its promise not to develop nuclear weapons. The question is then how quickly and to what degree will Iran’s economic situation deteriorate in the next year or so. If the economic clock for Iran runs out fast, we should expect it to resort to asymmetric responses and further instability in the Persian Gulf. If, as the data hints, the economy is stabilizing, albeit at a lower level, Iran could decide to use the sanction years (how long?) to restructure its economy away from oil and toward domestic production.
The reforms needed to do so range from reform of education and banking systems to better management of the exchange rate. If the government is working on a strategy to achieve all this, I do not know. But, when the big economic news from Iran is about kicking 800,000 rich people off the cash transfer roll, I have doubts. To be bust saving about $50 million a year when the economy is losing 5-10 percentage point in lost economic growth (worth $50 billion) a year, does not make sense.
Is Iran’s inflation rising?
The most recent report on consumer prices (link in Persian) published by the Statistical Center of Iran (SCI) last week shows that prices rose faster in Tir 1398 (June 21 to July 20, 2019) than they did in the preceding two months. Low inflation rates during Ordibehesht (roughly, May) and Khordad (June), 19 percent and 10 percent (measured annually), seemed to signal that the cost push inflation of 2018 may be working its way out of the system. But, the sharp increase in Tir prices, 38 percent annually, three times as fast as the previous month, may suggest otherwise. The dollar in the free market responded quickly, jumping above 120,000 rials per dollar. (more…)
Tyranny of numbers 
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