Managing Transition

Post-Doc and Teaching Fellow at Alzahra University
Managing Transition Managing Transition

While there is no dearth of news and analysis on the success of the Rouhani administration in taming galloping inflation, it is apparently under mounting pressure by consumers waiting for prices to decline, which in turn has led to recession in some sectors.

Given the government understanding of the challenges and high expectations of several spheres of the economy, it is worthy to note that when too much emphasis is put on the disruptive role of the international economic sanctions, the prospect of its removal and forecasts of decline in prices will eventually give rise to high expectations. While the government has the ability to influence most economic variables with prescription, the behavior of individuals is often unpredictable and cannot be changed easily.

In the meantime, while CBI officials have repeatedly emphasized the move toward single-digit inflation, a more specific short-run target will augment the adjustment of interest rates which should lift investments that in turn affects individual decision-making. Confronting the people's expectations is no small matter as the Japanese experience has demonstrated.

On the other hand, given the rapid increase in shopping malls and ongoing constructions, it seems the retail industry is busy getting ready for business after the sanctions unravel over the coming months. By the time cities are flooded by foreign-made consumer goods it will become difficult to control consumer enthusiasm, which will obviously translate into an increase demand for money.

By the same token, increase in money demand will lower bank deposits that are currently seen as safe haven due largely to the unreasonably high interest rates offered by banks and the army of financial institutions, namely the ones operating outside the purview of the government and the Central Bank of Iran.

It seems the economy is in a transition period from lack of demand due to expectations about lower prices and the possible future full of foreign products that will essentially increase money demand. Let's hope this transition phase will be as smooth as possible and the central bank will be able to check the omnipresent high inflation rates that have played havoc across the board for years together.