Iran struggles to shield economy from coronavirus pandemic

Shut out of international capital markets and facing a further hit to its finances with the collapse in oil prices coming on top of US sanctions, Iran is struggling to shield its economy from the coronavirus pandemic.

While Iran has the worst reported outbreak in the Middle East with a death toll that lags only Italy, China and Spain, it is spending only a fraction of the amounts its wealthier neighbours are throwing at their economies.

In a sign of its financial stress, Iran has asked the International Monetary Fund (IMF) for $5 billion in emergency funding, its first request since the overthrow of the Shah and the foundation of the Islamic Republic in 1979.

To mitigate some of the economic pressure, Iran has delayed business taxes and loan repayments until May and said about 3 million lower-income families without permanent jobs would get handouts of up to six million rials ($400) in four stages.

Limited financing options

But with state coffers battered by US curbs on oil sales and with other exports declining following the closure of several borders to Iranian trade because of the outbreak, Tehran’s financing options are limited.

The IMF estimated that Iran’s foreign exchange reserves would drop to nearly $70 billion this year from $86 billion in 2019, and that was before the coronavirus crisis hit.

Cut out of international capital markets, Iran can raise funds domestically though analysts say borrowing costs will be high and add pressure to its budget because of rampant inflation, which is being exacerbated by a weaker currency.

“Debt servicing costs will go up because of the high yields local bond investors ask for in light of the high inflation expectations,” said Niels de Hoog, economist at credit insurer Atradius.

Rial drops to its weakest

The rial dropped against the dollar this month to its weakest since September 2018, when US President Donald Trump pulled out of the 2015 nuclear deal and reimposed sanctions.

According to foreign exchange website Bonbast.com, the dollar was offered for as much as 159,500 rials on Wednesday, far weaker than its official rate of 42,000 rials.

The Statistical Centre of Iran said the inflation rate was 34.8 percent in the 12 months ending on March 19 while the IMF has projected a rate of 31 per cent for 2020.