Arash Azarmi is an economics and business expert working for Volant Media UK who own London-based Persian news channel, Iran International. From his education at Tehran Business School and the Institute for Management and Planning Studies, where he acquired both an MBA and MSc, alongside his career as an economic analyst which spans over 17 years, Arash is well versed on all issues relating to the global economy with a focus on Iran. His economic expertise has been included on a wide range of TV and Radio channels, including BBC Persian, Iran International and Radio Farda, as well as having his insights published in several articles for the BBC an Iran International and other outlets.
In this interview, the editorial staff of Financial Afrik collects its opinion on the state of the Iranian economy and the impact of American sanctions and the covid-19 pandemic on the rial, a national currency whose counterpart depends on the level foreign exchange reserves in dollars. At the time of the interview, 1 rial was worth 0.014 CFA Francs.
What are the consequences of Covid-19 and American Embargo on Iranian rials?
Since America began placing sanctions on Iran, the Iranian rial has lost 70% of its value. However, the recent depreciation of the rial began before the implementation of US sanctions, first dropping in value when President Trump announced that the US was to exit the Joint Comprehensive Plan of Action. So, if we go back further to include the six months before the US officially exited this agreement, the Iranian rial has lost more than 80% of its value during this period. One of the main areas that was adversely impacted by the US sanctions is Iranian oil revenues. The sanctions also made trade between Iran and the rest of the world very limited, causing the rial to depreciate even further. The growth of the broad money rate in Iran (more than 25-30% per year), coupled with the extremely low levels of economic growth (about 3%), have helped to create soaring levels of inflation of more than 20%, which has now been the case for decades.
Many economists believed that these conditions set the stage for the rial to depreciate to alarming levels, which was in many ways inevitable. However, despite predictions at the time that believed this would be imminent, Iran’s central bank aimed to tide this over by artificially strengthening the rial by injecting US dollars from oil revenues. After the first phase of US sanctions began in 2011, as well as after the newer round of sanctions, the Iranian central bank could no longer afford to inject enough US dollars into the economy to prop up the rial, causing the market to react and the currency to depreciate. After the US sanctions, the Iranian government had formed a network to facilitate trade with some countries in the region, such as Iraq, Turkey, the UAE and Afghanistan. This is how Iran is able to participate in global trade. However, Covid-19 has weakened these networks and Iran’s central bank did not have enough US dollars to inject into the market to make prices more reasonable for Iranian citizens, which has had dire effects on the Iranian economy and overall purchasing power. To put this into figures, the rate of the US dollar increased more than 17.6% in just one week against the rial. The problem continues on this trajectory, and it is heavily impacting on the quality of life for many Iranians.
Will the decision taken by government to prohibit citizens to buy foreign currencies be helpful in the aim of restoring the value of rial against dollar?
The limitations of demand for the foreign currency market is not new in Iran, and the government have been implementing similar strategies for a long time. After the problems with the Iranian foreign currency market last year, the new central bank governor, Abdolnaser Hemmati, declared that he was only going to assign foreign currency to the channels which were ‘officially approved’. This included activities importing goods, for which you would need to go to the Ministry of Industry and the central bank to prove that you need foreign currency for this reason and that these goods are necessary. This created a very complicated process for approval and limited the purchasing of foreign currency substantially. Tourism purposes or studying abroad were also valid reasons for buying foreign currency, albeit with restrictions, as there is an annual limit of 2,200 euros per year or its equivalence in US dollars for each citizen. However, the government’s strategy to limit foreign currency purchases has not been wholly successful. Although Iranians cannot buy foreign currency freely in conventional ways, black markets have emerged that provide a place to go for those that need more foreign currency than the government issued allowance, either for going abroad, protecting their money from further rial depreciation, or other needs.
How is the Iranian economy doing right now regarding the pandemic and the oil market?
When you look at the official data from the statistical centre of Iran, economic growth came in at minus 7 percent last year. The official inflation rate was a massive 35%, and this was before Covid-19. A few weeks ago, having seen the effects of the pandemic on the economy, the Economic Minister of Iran declared that it has caused more than a 15% depreciation in GDP. More than 4.8 million jobs are also either in danger or have been lost, according to the statistics from the Minister of Labour.
Due to the US sanctions and the significant reduction in global oil demand, Iran’s oil exports have taken a massive hit. This has severely impacted Iran’s finances given the reliance on this natural resource as a pillar of the economy.
All of these factors have caused substantial economic imbalances, with Iranian Parliament estimating that the government budget for this year has a 50% deficit. Many economists believe that this will cause an even higher inflation rate, as budget deficits are usually compensated by resources from the central bank, which will eventually cause an increase in broad money growth. Iran’s central bank recently announced that broad money growth was more than 8.3% in the first quarter of the year, which is extremely high compared to last year. There is major concern about all of these factors, which unfortunately do not reflect a bright future for the Iranian economy.
