Iran is used to coping with adversity, but this is something else

Pity Abdolnaser Hemmati, the governor of the central bank of Iran. The technocrat only took office in December, after the government found a scapegoat in his predecessor when it did away with a preferential exchange rate. That decision triggered widespread rioting. Two months later the war broke out.

Now Hemmati must cope with annualised inflation that hit 58 percent in May, compared to 53 percent the previous month.

Iranians have long diversified their savings – if they have them – into gold, hard currency and crypto. They need to. On the foreign-exchange market, the rial is trading at 176,000 toman to the dollar, according to the website Bonbast (which converts using 10 rials to the toman). It was 135,000 toman at the beginning of the year, a change of 30 percent in less than six months.

Meanwhile, the Tehran stock exchange reopened last month and the benchmark Tedpix index is up 51 percent in the year to date – probably as investors seek a hedge against rising prices around them. But trading in about 40 war-damaged stocks is not allowed and there are limits on daily volumes to curb volatility.

Ali Dadpay, a Texas-based economist and author of the Iran Ledger blog on Substack, says the release of monthly inflation figures – Iranian months run from the 20th or 21st of a Gregorian month – were delayed by over a week. This is probably because government statisticians were massaging the data.

The authorities have, for example, been forced to raise the price of bread. In the eastern city of Mashad the official price has increased by half on average. In the western city of Hamedan it is 60 percent. The official weight of flour used for each loaf has been reduced from 340 grams to 280 grams.

Dadpay says it is also important to distinguish between official subsidised prices and market prices. Some bakeries are charging substantially above the official rates. That said, the price of barbari, a flatbread and another staple, is still only about 3 US cents.

The steep rise in prices means the middle classes too are being sucked into privation. An increasing proportion of household income is going solely to rent and food – consumer durables and medicines are now beyond the means of many.

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According to residents and news reports, there is ample food in the shops in Tehran and other cities – and has been throughout the conflict. The Islamic Republic has a sophisticated system of food reserve and contingency management in place for situations like this. Iran is also (very) earthquake prone so is used to coping with adversity.

But it is used to nothing like this. The US-led blockade is unprecedented and is having a sizeable impact.

While agriculture is likely to benefit from ample rains and snowfall after years of drought, fertilisers are in short supply.

The authorities are also facing an awkward summer as electricity demand for cooling peaks. A lot of rental contracts renew over the summer, according to Dadpay.

In addition, job losses are likely in the country’s substantial petrochemicals sector as ways of exporting product are constrained to non-existent.

Iran can hope to source some supplies overland from Pakistan. But other neighbours such as Turkey and Azerbaijan may be less inclined to help. Iran has fired missiles or drones at both.

Either way, trucking will be more expensive than ship-bound supplies.

Tehran is gambling that poor results for Republicans in the midterm elections in November will undermine US resolve. The Trump administration, meanwhile, is hoping that the dire condition of the Iranian economy will bring ordinary citizens onto the streets as they came out on previous occasions when fuel prices were raised. This is a trial of strength.