Following the naming of the new Iranian year (started March 21) as “Inflation Control and Production Growth”, economic issues have once again taken center-stage as the most important challenge facing the country.
The crisis of inflation, reasons behind its emergence and solutions to control it are being talked about publicly in media outlets.
The fact is that Iranians have been dealing with “inflationary shocks” for more than 50 years. Besides its economic consequences, inflation has had negative political, social and cultural ramifications.
Vahid Shaqaqi-Shahri, an economist and university professor, prefaced his article for the Persian daily Ta’adol with these remarks. A translation of the article follows:
Inflation has widened inequalities, ruined the society’s moral compass and aggravated poverty in Iran. It also aggravated other negative consequences, including addiction, divorce, unemployment and other social ailments. Hence, inflation is not a mere economic phenomenon, as it leads to non-economic consequences.
Structural, Fundamental Phenomenon
Inflation in Iran is a structural and fundamental phenomenon.
Iran is among countries that have perpetually experienced high inflation.
Over the past 50 years, Iran has rarely registered single-digit inflation rates, as its economy has generally posted double-digit inflation.
Statistics show average inflation in Iran has stood at 20% in the past 50 years which, unfortunately, hit 40% in the past five years.
The economy is predicted to continue its struggle with inflationary conditions in the new Iranian year [started March 21]. Pessimistic scenarios forecast inflation to exceed 40% in the fiscal 2023-24.
Outcome of Five Imbalances
Inflation in the Iranian economy is the outcome of five imbalances: budget deficit, banking imbalance, trade deficit, capital account deficit and production gap.
Each of these imbalances in turn creates other problematic imbalances. For example, the budget deficit has imbalanced pension funds which, in turn, exacerbate budget deficits that drive up inflation. Therefore, curbing inflation is a pressing issue and the economy needs structural reforms to address it.
In the past 50 years, none of the Iranian governments has carried out structural reforms to control inflation. They were not willing to pay the price of structural reforms. On top of that, beneficiaries who gain from high inflation resist any control policies. All in all, it is impossible to overcome the inflation crisis without redressing these five imbalances.
One might ask why single-digit inflation rates were registered during the terms of some governments while othes posted runaway inflation. The decline in inflationary expectations (thanks to the improvement of international relations), which acted like short breaks, is the answer.
The Central Bank of Iran has reported that inflation stood at 46.5% in the fiscal 2022-23, i.e. the second highest inflation rate in the years following the Islamic Revolution. The highest inflation rate dates back to the fiscal 1995-96 with 49%.
Pressing Need for Reforms
If the government fails to introduce reforms, banking imbalance will worsen inflation. Three other causes of inflation (non-oil trade deficits and deficits arising from capital and production gap) will make the economy suffer high inflation.
The worrying issue is that in recent years, the capital account deficit has increased following the outflow of capital. Investments that used to enter Iran flowed into neighboring countries, aggravating the capital account deficit and currency imbalances. The whole thing leads to the depreciation of local currency and inflation.
Another pressing crisis pertains to the deficit in pension funds, an emerging super-challenge which, if left untreated, will compound the budget deficit and inflation.
In general, the longer the implementation of structural reforms is delayed, the more problems will crop up in the economy and living conditions will become tougher.
Therefore, the most important measure to contain inflation is to carry out structural reforms and stabilize the five imbalances.
