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Iran consumer prices remain stubbornly high despite rial recovery

Despite the Iranian national currency's comeback, consumer prices have yet to see commensurate drops due to price rigidity and uncertainty over the country's economic future.
Iranians shop in the capital Tehran's grand bazar on November 3, 2018. - Iran's supreme leader Ayatollah Ali Khamenei said today that President Donald Trump has "disgraced" US prestige and would be the ultimate loser from renewing sanctions on the Islamic republic.
Trump announced in May he was withdrawing from the 2015 nuclear deal and reimposing sanctions, sparking outrage among world powers who say Iran has been complying with commitments to restrict its atomic programme. (Photo by ATTA KENARE / AFP)

Following months of turbulence this year, the Iranian rial has regained a significant portion of its lost value in the past several weeks. However, this trend has not been seen in consumer prices, leading to increasing public discontent.

The depreciation of the rial has led to sharp jumps in the prices of imported products, ranging from vehicles, audio-visual devices and cellphones to iron and aluminum. Given the import tariffs levied by the authorities, these kinds of products were already sold in Iran at prices often higher than the global average.

One example that could shed light on the situation is the iPhone. Since Apple has no official representative office in Iran, the US company's products — and iPhones in particular — are imported via China and Hong Kong, with the rial price set on the basis of the dollar rate.

That puts the price of an iPhone XS 64GB in Iranian markets at 150 million rials, or $1,187, whereas the rate in international markets is $999. The rate of the US dollar on the open market in Iran as of Dec. 23 was 103,000 rials. In other words, on the market rate the price of the popular device must stand at around a much lower rate of roughly 103 million rials, rather than 150 million.

Alireza sells iPhones imported from Hong Kong to Iranian customers online. "Even during the free fall of the rial [earlier this year], rarely did we have a problem with supply availability," he said. "But in recent weeks, we have had a hard time finding iPhones to import." He also told Al-Monitor that the scarcity has shrunk his stocks. To him, a natural consequence of this is "a jump in prices."

But it is not just the cellphone market that has faced price hikes. The same applies to imported and domestically produced vehicles. Iranian consumers' expectations to see prices plunge in those categories, given the strengthening of the rial, are far from being fulfilled.

A Peugeot 206 was sold for 620.2 million rials Sept. 17, when the value of the dollar on the open market stood at 143,000 rials. The same supermini was priced at 60 million rials Dec. 22 in spite of the considerable rise beyond 25% of the rial’s value during the period in between. As a matter of fact, the rial’s strengthening did little to stabilize the Peugeot 206 market and led only to a 20-million-rial drop (less than 3%) of the French brand, which is being manufactured in Iran by a domestic automaker.

When it comes to imported vehicles, the situation is even worse as the gap remains wider. A 2018 Hyundai Elantra, for instance, stood at a whopping 3.55 billion rials Sept. 17, which was $24,800 on the basis of the open market rate of the US dollar at the time. Despite the rial’s relative comeback, the price hovered above 3.30 billion rials Dec. 23, or $32,000 on the day's rate.

Exploring the explanations behind these discrepancies, Iranian experts have offered multiple theories. "There are a variety of reasons," Ali Hagh, an Iranian economist, told Al-Monitor. "First, prices in the economy maintain a general tendency toward rigidity. They resist drops. Second, with the reimposition of sanctions [following the US pullout from the Joint Comprehensive Plan of Action], the costs of transactions have experienced hikes, leading to a higher final consumer rate of the imported products." The expert further attributed the problem to the bleak prospects of the Iranian economy. "With crude prices going down amid a plummeting of Iranian oil exports, the assumption is rife that the Iranian rial will once again go downhill," he said.

The current imbalance between the stubbornly high consumer prices and the rial’s higher value has already led to public discontent, with ordinary citizens increasingly maintaining that it is the affluent and greedy businesses that do not give in to moderating the prices in their pursuit of maximum profit. This notion is further strengthened by some within the ruling elite. Hard-liners, especially, are pushing the argument that, with their endless greed, "the financially corrupt" are disrupting the country's economic order.

In a Nov. 26 editorial, hard-line daily Kayhan, which is close to the supreme leader's office, tried to dig into why prices were still fixed despite the plunge in foreign currency rates. The rial’s rise against the greenback, according to the paper, was made possible thanks to the judiciary's measures, including the widespread arrests of currency dealers on the street, the detention of the central bank’s then deputy for foreign exchange — a nephew of deputy foreign minister and senior nuclear negotiator Abbas Araghchi — and death sentences handed down to fraudulent tycoons. While admiring the judiciary, which is controlled by hard-liners, Kayhan insisted that the "inefficiency" of President Hassan Rouhani's moderate government was to blame for the stubbornly high prices. 

The problem has not been exclusive to vehicles and cellphones. It has already encompassed basic supplies, including such categories as food and hygiene products. "The rates of food, hygiene and even agricultural and meat products are not normally very dependent on the foreign currency rates," Saheb Sadeghi, an economy expert, told Al-Monitor. "The goods that have enjoyed access to the government-devised NIMA currency [rate] have been imported with dollar rates lower than that on the open market in the past few months. Still, unless the secondary [NIMA] rate [for the US dollar] — which is within the range of 88,000 to 92,000 rials — goes further down proportionately, one cannot expect a drop in prices of those products."

NIMA serves as a secondary forex market, which the Iranian government launched back in April in an effort to lay the ground for further transparency and online transactions of foreign currencies. However, the government has covered only specified importers in an effort to boost them following losses they incurred as a result of the rial’s depreciation on the open market.

Despite the relative success of the Rouhani government’s measures in stabilizing the Iranian exchange market and reversing the downward trend of the national currency, market prices have not seen palpable and proportionate drops due to increasing worries over the country's immediate economic prospects. Against this backdrop, a nail biter triggered by foreseeable impacts of the reimposed US sanctions, coupled with uncertain and diminishing hopes about European plans to shield the Iranian economy, are also fueling concerns and only further deteriorating the situation.

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