Iran Country Report May19 - May, 2019

May 3, 2019

Iran’s economy is expected to shrink for a second consecutive year in 2019 while the country’s consumer price index (CPI) inflation could hit 50%, the International Monetary Fund said on April 29.

The US will from May 2 step up its attempt to throttle the Iranian economy to force concessions on Tehran’s approach to Middle East affairs by trying to force Iran’s crude oil exports to zero. Last year’s reintroduction of sanctions against Iran pushed the Iranians back into recession, with growth contracting by 3.9% in 2018, IMF estimates suggest. The Fund now sees Iran on course for at least a 6% decline in GDP in 2019, according to Jihad Azour, director of the IMF’s Middle East and Central Asia department. CPI prices could average 50% higher this year, given the tougher situation the economy is exposed to. Before the announcement on driving to eliminate oil exports, the IMF was predicting inflation of 37%.

The re-imposition of heavy sanctions on November 5 and the removal of the waivers that allowed some countries to temporarily continue importing Iranian oil without fear of US sanctions will have an additional negative impact on the Iranian economy both in terms of growth and in terms of inflation.

On April 22, US President Donald Trump announced his administration was ending exemptions from sanctions for countries still buying oil from the Islamic Republic.Trump said waivers for China, India, Japan, South Korea and Turkey would expire in May. Three other waiver holders, Greece, Italy and Taiwan, have already stopped importing Iranian oil. April 22 also saw a hardliner appointed to head the Guard.

April 22 saw Iran and Turkey open a special financial channel for exports of Iranian gas and oil to Turkey. Under the system Iranian goods might be paid for with Turkish lira to help it steer clear of US sanctions. China, meanwhile, reiterated that it opposed unilateral US sanctions. India's government was studying the implications of the US announcement.

Iran should work to eliminate the gap that currently exists between the Iranian rial (IRR) market exchange rates and official exchange rate, according to the IMF, which will help tame and control inflation and reduce pressure on the exchange rate. The IRR is around two-thirds weaker against the dollar on the unofficial market compared to where it stood before it became clear early last year that the US was switching its Iran policy back to a sanctions-led approach.

The Central Bank of Iran (CBI) is in the midst of addressing this task, according to CBI governor Abdul Nasser Hemmati who posted comments on the matter to his Instagram feed on April 28.

Some internationally renowned economists, such as Steve Hanke at Johns Hopkins University in Baltimore, have estimated that Iran’s annual inflation rate is running at more than 270% compared to the official claim of 51.4% in March-April.

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