Growth Prospects & Fear of Rising Inflation

Domestic Economy Desk
Rising Inflation Would Mar Iran's Growth ProspectsRising Inflation Would Mar Iran's Growth Prospects
Double digit inflation is a sign of economic fluctuation and instability. It induces uncertainty among investors, giving them second thoughts about bringing their capital into the country

If inflation bounces back to above 10%, it will hamper economic growth, Masoud Nili, a senior economist and top advisor to President Hassan Rouhani, said.

“If we lose the single-digit inflation rate, economic growth will move downward,” he was quoted as saying last week.

The latest report released by the Central Bank of Iran shows the average goods and services Consumer Price Index for urban areas in the 12 months ending January 19, which marks the end of the Iranian month of Dey, reached 8.58%.

The inflation rate remained almost unchanged compared to that of the preceding month (Azar). 

The overall CPI (using Iranian year to March 2012 as the base year) stood at 254.9 in Dey, indicating a 0.8% growth compared with the previous month and reached 9.6%. 

A closer inspection of inflation rates in Azar and Dey shows there was a 0.01 rise month-on-month which, though seemingly insignificant, indicates the end of months of downtrend. 

According to CBI, Producer Price Index in the 12 months to the end of Dey reached 4% compared with last year’s corresponding period. This shows an increase of 0.5% compared with the preceding month.

PPI (using the Iranian year to March 2012 as the base year) stood at 233.3 in Dey, indicating a 1% growth compared with the previous month.

> Specter of Double-Digit Comeback

PPI’s trajectory is usually followed by CPI with a short time lag. The recent rise in PPI is likely to be reflected in the average CPI inflation rate in the months ahead, although the rise is evident in the latest statistics, albeit slightly. This could raise the specter of a comeback of double-digit inflation.

Iran's inflation rate went below 10% for the rolling year ending June 20. This was the first time the country was experiencing single-digit inflation in about a quarter century.

“Double digit inflation is a sign of economic fluctuation, instability if you will,” CBI analyst Pouya Jabal Ameli told Financial Tribune.  

“It induces uncertainty among investors, giving them second thoughts about bringing their capital into the country."

Compared to many developed countries, Iran's inflation is still considered very high.

Amid the credit crunch resulting from the falling oil prices over the past years, the government is banking on foreign investment to spur development in the economy, which was isolated for years due to sanctions imposed over the country’s nuclear energy program.

An official report published early January by the government showed the Islamic Republic approved $11.8 billion in FDIs during the 12 months to December 21, including $11.33 billion pertaining to greenfield and $496 million to brownfield investments.

These indicate an inflow of foreign capital following the removal of embargoes on January 16, 2016, as part of a historic nuclear deal Tehran clinched earlier in 2015 with world powers.

According to CBI, the Iranian economy grew 7.4% in the first half of the current Iranian year (started March 20, 2016), mostly owing to the rebound in oil exports.

> Need to Attract FDI

The government is aiming for an 8% GDP growth as stipulated in the sixth five-year development plan (2016-21). Nonetheless, this will not be easy without foreign investment.

The list of major obstacles putting off foreign investments in Iran includes legal uncertainties regarding sanctions, corruption and risk of economic instability.

The Rouhani government has worked hard to do away with the former obstacle by stabilizing the foreign exchange market and fighting runaway inflation.

After inheriting an inflation rate of over 40%, one year into office, Rouhani's economic team cut the rate to half and then pulled it below 20% in September 2014, and then to around 15% in March 2015. 

Asked earlier this week by the Persian daily Shargh whether he is confident that inflation will stay in the single-digit zone, Economy Minister Ali Tayyebnia said, “You can never speak confidently in this regard. We, economists, cannot talk with certainty.” 

He, however, added, “I see a good future. I believe we can maintain the single-digit inflation. This is feasible.”

International Monetary Fund, in its latest report predicted that Iran’s inflation will average about 9% in the 2016-17 fiscal year, before temporarily rising to just over 11% in 2017-18 due to the pass-through from recent exchange rate depreciation.

Rial has lost significantly against the dollar in the past few months. As currency fluctuations are among the main contributing factors to Iran’s inflation rate, experts believe this will affect the inflation rate in the near future.

“The challenge now is to create the conditions for sustained macroeconomic stability and growth. Comprehensive and coordinated reforms that seek to defend low and stable inflation, restructure and recapitalize banks, cast fiscal policy in a medium-term framework to support reforms and prioritize legal and regulatory changes that facilitate investment, aid job creation and improve governance would help achieve these goals. Better data quality, availability and timeliness would support the reform process," the report reads.

“Prudent fiscal policy and liquidity management are critical to keep inflation low and stable. The government should sharply reduce its directed credit schemes and adjust regulated prices to curb liquidity pressures.”

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