Iran Inflation Not as Bad as We Think?

Iran’s currency, the rial, has been hit with hyper-inflation over the last years, rising from about 10,000 rials to the U.S. dollar to more than 35,000 as of last week. The inflation rate has led to street demonstrations and other calls for the government to defend the rial.

But at least one analyst doesn’t think that the situation is out of hand yet. Ehad Mostaque of London’s Religare Capital Markets is cited at the Financial Times Alphaville blog as saying that the “official” exchange rate of 12,600 rials to the dollar applies to both food and medicine within the country, while imported goods and other intermediary goods meant for industrial production are hit with the “parallel” rate of 35,000 rials to the dollar.

Given that, Mostaque concludes

On an economy of $480bn, we are not looking at economic collapse here given basic products will still come in at the appropriate rate and the subsidy reform program has now been halted, so basic essentials such as food staples, gasoline etc are still available at the same fixed Iranian rial price as before with rough equivalence in dollars coming in and out …

The dollar scarcity is hitting the Iranian middle class hardest, but they account for less than 20% of the country’s population. The other 80% are poor and continued subsidies on food and gasoline have served to maintain their spending power.

Mostaque expects the rial to stabilize at a rate of 22,000 to 24,000 rials to the dollar. And while the bad money may be driving out the good, that good money is not going into safe deposit boxes, but rather into government hands. And as long as the government spends the money on popular subsidies, it can continue to maintain some control over purchasing power and official exchange rates.

The FT Alphaville blog post is available here.

Paul Ausick