New data released on the Purchasing Managers' Index for Iran’s overall economy show the benchmark has hit a record high.
The latest survey of the Statistics and Economic Analysis Center of Iran Chamber of Commerce, Industries, Mines and Agriculture — the sponsor and coordinator of PMI reports in Iran — show the index (known by its Farsi acronym Shamekh) settled at 56.17 for the second month of the current fiscal year (April 21-May 21) from 37.49 registered in the previous month, indicating an 18.86-point or 49.83% growth.
The PMI indicates the prevailing direction of economic trends in the manufacturing and service sectors. The headline PMI is a number from 0 to 100, such that over 50 indicates an economic expansion compared with the previous month. A PMI reading under 50 indicates contraction and a reading of 50 implies no change.
PMI is an index of the prevailing direction of economic trends, aiming to provide information about business conditions to company directors, analysts and purchasing managers.
As the commerce chamber explains, the steep rise experienced by the index owes partly to resumption of normal business activities in the second month of the year following long holidays in the first month of the year.
The first fiscal month (started March 21 this year) typically sees a decline in economic activity every year, as it starts with the Iranian New Year holidays (March 21-April 3), as businesses only have 15 working days.
Notably, considering the shortage of working capital and decline in purchasing power, the drop in economic activities in the first month of this year has been more pronounced.
“The surveyed businesses believe the rise in demand owes, on the one hand to recovery after New Year holidays, and on the other to increased buying ahead of the surge in prices,” the report said.
The government recently decided to abolish the controversial practice of allocating cheap dollars at the rate of 42,000 rials per dollar, locally known as Preferential Foreign Currency, to imports of essential goods, including corn, soymeal, unprocessed oil, oilseeds and barley, in addition to wheat, flour and medicine. Instead, it is depositing cash directly to the account of income deciles 1 to 9.
The market value of the dollar is currently above 300,000 rials.
“Until now, we have been paying to producers [read importers] but now the subsidies go to consumers. In fact, the Preferential Foreign Currency has not been ceased, rather the allocation method has changed,” President Ebrahim Raisi said in a televised speech on the eve of introducing the move last month.
In his speech, Raisi emphasized that the removal of cheap dollar allocation will not lead to a price rise in wheat, flour and medicine. However, the move led to a dramatic rise in the prices of essential goods.
Also known as necessity or basic goods, essential goods are products consumers will buy, regardless of changes in income levels.
In fact, the prices of other food products have also risen suddenly in a ripple effect.
“In general, PMI has been on the rise, except for services and agriculture sectors. The sharp growth in the prices of raw materials is affecting the selling price. Economic activities in the services and agriculture sectors are expected to decline next month,” the PMI report said.
“A number of businesses have not increased their prices in proportion to the increase in costs just to maintain customer demand. Enterprises are faced with challenges regarding the supply of raw materials, as a result of unfavorable prices and severe liquidity shortages. Businesses that were dependent on the subsidized foreign currency are now grappling with a lack of liquidity following the increase in prices of raw materials. They are unable to supply products at government-mandated prices.”
PMI Sub-Indexes
The ICCIMA survey has five main indices to calculate the overall PMI.
According to the report, the “business output” sub-index declined from 58.81 in the last fiscal year’s 12th month (Feb. 20-March 20) to 28.52 in the first month of the current fiscal year (March 21-April 20), but increased to 61.37 in the second month (April 21-May 21).
The “new orders” sub-index decreased from 55.44 in the 12th month of last fiscal year to 29.34 in the first month and increased to 55.19 in the second month.
The “supplier deliveries” sub-index, which measures how fast deliveries are made, decreased from 59.76 in the month ending March 20 to 48.16 in the month ending April 20 and increased to 58.6 in the month ending May 21.
The “raw materials inventory” sub-index decreased from 54.74 in the month ending March 20 to 41.64 in the month ending April 20 and grew to 45.34 in the month ending May 21.
The PMI reading of “employment” sub-index increased from 44.82 in the month ending March 20 to 50.85 in the month ending April 20 and grew to 54.74 in the month ending May 21.
To calculate PMI, seven secondary criteria are also surveyed by the center, namely “raw material purchase prices”, “warehouse inventory”, “exports”, “product price”, “fuel consumption”, “sales” and “production expectations”.
The “raw material purchase prices” sub-index grew from 78.47 in the month ending March 20 to 83.26 in the month ending April 20 and increased further to 92.75 in the month ending May 21.
The “warehouse inventory” sub-index increased from 50.83 in the month ending March 20 to 52.16 in the month ending April 20, but decreased to 49.63 in the month ending May 21.
The “exports” sub-index decreased from 54.02 in the 12th month of last year to 38.65 in the first month but grew to 50.7 in the second month.
The “prices of manufactured products or services” sub-index increased from 57.97 in the month ending March 20 to 63.13 in the month ending April 20 and grew further to 70.05 in the month ending May 21.
The “fuel consumption” sub-index decreased from 48.48 in the month ending March 20 to 34.81 in the month ending April 20, but grew to 62.22 in the month ending May 21.
The “sales” sub-index decreased from 55.37 in the month ending March 20 to 34.27 in the month ending April 20, but grew to 60.08 in the month ending May 21.
The sub-index of “business output forecasts for the following month” increased from 35.29 in the month ending March 20 to 72.05 in the month ending April 20, but decreased to 43.82 in the month ending May 21.
The overall PMI decreased from 54.74 in the month ending March 20 to 37.49 in the month ending April 20 and grew to 56.17 in the month ending May 21.
PMI, among the most precise indicators showcasing a country’s economic condition, was first devised by the Institute for Supply Management in the United States in 1948. It is calculated as (P1 * 1) + (P2 * 0.5) + (P3 * 0) where P1 is the percentage of answers reporting an improvement, P2 is percentage of answers reporting no change and P3 is percentage of answers reporting a deterioration.
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