Inflation rose to unprecedented levels with the imposition of sanctions on Iran’s oil sales in the early 2010s but it slowed down with the election of former president, Hassan Rouhani, to less than 10% in five years.
Since the fiscal 2018-19, inflation has been on the rise, worrying many economists. Now the main question is why policymakers insist on applying the same failed measures to control inflation and why this unparalleled inflation has been formed in recent years.
Economist Morteza Imanirad prefaced his article for the Persian economic daily Donya-e-Eqtesad with this note. A translation of the text follows:
I believe monetary policies adopted in Iran after the Islamic Revolution of 1979 have been a tool to whitewash inefficiencies, or meet political expenses. They were not used as an instrument to regulate prices. The volume of money turned into a dependent variable for meeting the needs of governments. This constant need basically led to the growth of inefficiencies and political costs. Therefore, when inefficiency increases continuously, government’s need for money to compensate for these inefficiencies follows suit and this increases the dependency of the money supply variable.
At present, money supply has surpassed the ability of governments in terms of growth and is one of the main reasons for the rise in inflation (which has continuously surged since 2018-19, hitting all-time highs since World War II in the last two years)
Here the link between production and the volume of money breaks and gives rise to inflation. More inefficiency leads to more money supply and inflation. This is the main reason why policymakers cannot do anything for inflation despite their knowledge of monetary policymaking.
Governments increased the volume of money to solve their problems, but it turned into a bigger problem as it increased. At present, money supply has surpassed the ability of governments in terms of growth and is one of the main reasons for the rise in inflation (which has continuously surged since 2018-19, hitting all-time highs since World War II in the last two years).
The country will be facing two inevitable scenarios in the next fiscal year [starting March 21]. According to the first scenario, inflation will continue to rise and the government will fail even more to control it. As a result, we should expect this year’s 50% inflation to scale new heights next year. In the second scenario, the government may be able to control the inflation rate and reduce it to levels lower than what we are seeing now by taking preventive measures [but not necessarily correct measures]. In this case, the economy will fall into recession which, in turn, will increase the government’s budget deficit, in view of declining tax revenues.
In general, thanks to the severe sanctions imposed by the administration of US President Joe Biden, it seems that next year will be a tough year for Iranian policymakers. In the upcoming year, we will have a laundry list of economic shortcomings and missteps put together by the previous governments and the current one over the past 44 years.
Solving these two problems is beyond the power of economic policies because the main cause is rooted in political inefficiency. Therefore, its solution should be searched in non-economic radical measures that impose a high cost and risk, given the decline in social capital.
