The Central Bank of Iran will carry out monetary policy more effectively if sanctions against it are lifted, a recent report by the Economist Intelligence Unit says.
The CBI has been targeted by sanctions from the US and EU over a 12-year nuclear dispute, making it difficult to clear payments for the government’s oil sales, thus depriving Iran of foreign exchange. This in turn has undermined the central bank’s capacity to prop up the rial, due to which the rial lost over 70 percent of its value against a basket of major currencies during the 2012 market crash.
However, the CBI “will be more empowered under its governor Valliolah Seif, whose predecessor had to put up with interference in monetary policy by former president Mahmoud Ahmadinejad,” writes the research and analysis division of London-based The Economist Group in its report.
During 2014, the central bank focused on restricting monetary base and raising interest rates on loans in order to lower inflation. These efforts have been successful in bringing inflation well below 20 percent from 2013’s 37.7 percent.
But, CBI’s work to bring the money market under its supervision has been moderately effective, at best.
Prices Slow Their Rise
The disinflation trend in Iran will become steadier in 2015. EIU goes on to write: “We expect inflation to average 15.8 percent. We expect inflation to then moderate further to around 10.5 percent in 2018-19.”
This will come about due to tighter monetary and fiscal policy, and attempts to improve Iran’s global relations.
“Ongoing shortages and further price rises related to subsidy reform will keep inflation at high levels, however,” the report adds.
There is also the risk of another devaluation of the rial in 2015-16, instigated by the recent fall in oil prices, which would lead to an upward spike in inflation. While the budget is balanced, the report says, net budget deficit will widen to three percent of GDP from an estimated 0.8 percent of GDP in the fiscal year ending March 20, 2015. EIU forecasts the deficit to average three percent of GDP annually up to 2020. This will increase inflationary pressures, further weighing on the CBI.
Rial in Dire Straits
The rial which lost over seven percent versus the dollar in the free market in November, in reaction to the lack of a comprehensive deal and sliding oil prices, has regained minor ground and now trades at 34,050 rials per dollar.
But, there is still a substantial divergence between the market rate to which most Iranians have access to and the official rate for the dollar, which now stands at 27,670 rials. Central bank officials have said many times that they intend to close this gap.
“If Iran manages to win greater concessions on sanctions, we expect the gap between the two rates to narrow, improving confidence in the value of the official rial,” according to the report. But in the meantime, the official value of the rial is likely to continue its weakening trend if sanctions persist.
Nuclear talks between Iran and the six world powers known as the P5+1 are in process to reach a permanent agreement, which would lead to the lifting of economic sanctions against Tehran. However, without a long-term deal and with oil prices at a six-year low, the rial is at risk of another significant official devaluation, EIU writes.
