By Davide Barbuscia and Parisa Hafezi
DUBAI, March 25 (Reuters) – Shut out of international capital markets and facing a further hit to its finances with the collapse in oil prices coming on top of U.S. 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.
But with state coffers battered by U.S. 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.
The rial dropped against the dollar this month to its weakest since September 2018, when U.S. 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% in the 12 months ending on March 19 while the IMF has projected a rate of 31% for 2020.
‘FAR FROM COLLAPSE’
Iran‘s Supreme Leader Ayatollah Ali Khamenei has said the country has the capability to overcome any kind of crisis or challenge, including the coronavirus outbreak.
Saeed Leylaz, an economist based in Iran, said the country may face national poverty but the economy was far from collapse.
“Iran has the domestic production capacity … there is a long way for Iran‘s economy to collapse. Iran‘s heavy industry and agriculture sectors, both main parts of the real economy, have remained intact,” he said.
“All the aid packages count for around 7% of Iran‘s budget … this is not a huge amount,” said Leylaz. “Iran‘s main problem now is containing the outbreak.”
Iran‘s pledged financial support is equivalent to about 0.2% of its gross domestic product (GDP), according to Scott Livermore, chief economist at Oxford Economics Middle East.
By comparison, stimulus packages come to nearly 30% of GDP in Bahrain and Oman, more than 10% in the United Arab Emirates and Qatar and over 4% in Tehran’s regional rival Saudi Arabia, according to Fitch Ratings.
“Even factoring in other measures, then it is unlikely the government is offering major support. This reflects the difficult finances with the budget deficit expected to be over 7% of GDP in 2020,” said Livermore.
Andrine Skjelland, head of MENA country risk at Fitch Solutions, also said printing money to provide more stimulus would not necessarily improve livelihoods.
“This would add to already elevated money supply growth and fuel inflation, thus capping the positive effect on household consumption,” she said.
Some help is coming from the European Union, which plans to send 20 million euros ($21.6 million) in humanitarian aid and support Tehran’s request for IMF help.
But for now, the worst hit are the Iranians with no permanent jobs, such as street vendors and construction workers.
“All the construction in my city has stopped. I have no job, no money and no (health) insurance,” said construction worker Hassan Hajati, 42, from the city of Rasht. “Where should my three children live? In the street?”
(Additional reporting by Andrea Shalal in Washington; Editing by David Clarke)