It is of paramount importance for the government to tame inflation. So long as it fails in this key arena, all economic policies, including the so-called plan to “boost production” and “support the poor and middle class” go south, says Vahid Shaqaqi-Shahri, an economist and university professor, in an article in the Persian-language newspaper Ta’adol. Translation of the full text follows.
The Statistical Center of Iran says monthly inflation shattered all records in the third month of the current Iranian year (May 22-June 21) reaching 12.2% and 8.7% higher on the previous month.
Goals such as increasing production (pulling the country out of recession and improving production) don’t materialize in an economy grappling with hyperinflation of 50% and 60%. Besides, welfare policies also fall by the wayside and people’s purchasing power takes a drubbing. It is my strong conviction that the government must first concentrate on fighting inflation.
Inflation is not a sectoral or an executive factor; it is a pan-sectoral and trans-institutional challenge. Hardly does a day pass when MPs do not give a minister a tongue-lashing on inflation.
However, the fact of the matter is that parliament itself is one of the main culprits behind the high and rising inflation. Needless to say, many if not all economic woes, including inflation, are rooted in budget imbalances and deficits, the budget approved by parliament. Of course, parliament is in denial as if it has no role in economic problems!
Recently teachers’ salaries were increased by the parliament. You cannot increase the wages of our teachers and keep those of retirees and other workers unchanged. The ripple effect of such decisions is budget deficits.
The Majlis must be held accountable for its role in the problems arising from deficit spending and inflation.
Dysfunctional banks are the other culprits fueling the flames of inflation by creating money [liquidity]. Banks are creating money at terrible speed thanks to the additional financial burden imposed on them.
First budgetary and bank imbalances and inflation expectations manifested their destructive impact pushing up prices in the forex, gold, auto, housing and capital markets. Soon after the goods and services market saw historically high prices with monthly inflation rate hitting an all-time high
According to the latest reports, bank overdrafts have reached more than 1,200 trillion rials [$3.76 billion]. This suggests that lenders are more dependent on the largesse of the Central Bank of Iran and generosity of the market.
Ill-conceived decisions like the 57% increase in worker wages are compounding the inflation curse. The man in charge of this immature decision (Hojjat Abdulmaleki, the former minister of Cooperatives, Labor and Social Welfare), had to step down. But the aftereffects of his decision will hang around the troubled economy.
In an economy that is not tech-based (Iran has a labor-oriented economy), higher wages lead to increase in production costs and by extension inflation. In the meantime, the challenges of a command economy have their own adverse effects on consumer prices.
It merits mention that inflation is also a function of costly imports. The United States has logged 8.5% inflation for the first time in its modern history and the EU is doing 8% with more to come.
One disturbing factor is that inflationary expectations are rising due to the US sanctions. In early 2021, the Joint Comprehensive Plan of Action was to be concluded but the negotiations ended in an impasse and as a result the exchange rate of US dollar jumped to 320,000 rials from 250,000 rials in a matter of few months. The 30% jump translated into a tsunami in all asset market (gold, auto and housing markets).
On the other hand, in the middle of the storm the government decided to get rid of the decades-old forex subsidy policy for basic imports further adding to the plight of consumers as the prices of goods and services overnight shot up to new highs. The rise in food and beverage prices contributed to 80% of the 12.2% official inflation rate reported last month.
Under the circumstances, the inflation engine of two key markets (asset market and goods and services) started to roar simultaneously and for the first time.
In the past, first the asset market would enter the inflationary phase and the market of goods and services would follow suit. But now the two markets are twins unleashing high inflation at the same time.
First budgetary and bank imbalances and inflation expectations manifested their destructive impact pushing up prices in the forex, gold, auto, housing and capital markets. Soon after the goods and services market saw historically high prices with monthly inflation rate hitting an all-time high.
The inflation we see now, on the one hand, is the handiwork of the government and parliament and their poorly informed judgements, and on the other product of international developments.
