Iran’s economy has become hypersensitive, reacting suddenly and sharply to developments and events. This hypersensitivity was built up over 40 years [since the 1979 Islamic Revolution], imposing huge and irreparable losses on economic players. This was stated by Sohrab Delangizan, an economist, in an article for the Persian economic daily Donya-e-Eqtesad. A translation of the text follows:
The Iranian government, as the main player in the economy, has practically occupied all the decision-making realms of the private sector such as pricing, marketing, distribution, imports, exports, securing loans, as well as starting and closing businesses. By taking decisions that are not in accord with economic conditions, the government has cleared the deck for crisis.
Complications regarding economic relations with the world have adversely affected the private sector’s economy. A steep rise in the value of the dollar, the increase in money supply as a result of flawed banking rate of 38% while inflation is 50%, along with destabilizing conditions and mistrust in making any investment that has disrupted production, are all sensitizing factors of Iran’s economy.
With this level of sensitivity, any type of exchange rate forecast and any news or event that can have disappointing effects on the future of businesses can set business owners on a preordained path.
A steep rise in the value of the dollar, the increase in money supply as a result of flawed banking rate of 38% while inflation is 50%, along with destabilizing conditions and mistrust in making any investment that has disrupted production, are all sensitizing factors of Iran’s economy
In the current situation, where there is uncertainty about Iran’s economy due to internal protests, the not-so-favorable ties with neighboring countries, the failure of nuclear negotiations, unusual decisions taken by economic ministries, changes and reforms that do not conform with the competitive domestic and foreign environments introduced by the parliamentarians and giving more opportunities to people who do not hold an official position but are able to endanger the country’s relations with neighbors and the world with their opinions have had destructive effects on the key variable in the economy, i.e., the foreign exchange rate.
Any kind of negative news impacts the exchange rate, which can send other markets, including the stock exchange, real-estate and even money and credit markets, into turmoil.
The inflation and the real interest rates seem to be other anchors that have significant effects on the economy. An anchor effect makes it possible for the ship to move in the area where it is anchored. Fos instance, the inflation rate changes according to the exchange rate and money supply growth. Therefore, it was logical to see a rise in inflation last month, given the money supply growth, exchange rate volatility and other negative news.
Given the monthly inflation rate that went up in the months ending Sept. 22 and Oct. 22 (2.2% and 3%, respectively), the money supply growth because of the high budget deficit, new government expenses, the depreciation of rial against the dollar from 300,000 to 340,000 rials per US dollar in recent weeks, the uncertain atmosphere as a result of internal situation and the new international threats to the country, a decrease in inflation rate became unlikely. You can’t expect economic growth for the next six months, either.
Food inflation (at an annual rate of 70%) has worsened the economy of the middle class and low-income groups. The high rate of food inflation has spread to non-food goods and services, and may result in higher headline inflation rates than before. This trend started in the fiscal month ending June 21, when the government suddenly removed the subsidies of essential goods and claimed that it had no effect on inflation.
Under the current circumstances, the real interest rate, despite the nominal interest rate of nearly 20% in Iran’s banking system, is actually experiencing a large negative figure that makes any type of loan profitable for any borrower.
Therefore, the demand for loans and credit by special groups will accelerate the creation of liquidity (they convert the loans into dollars in the forex market).
The whole thing makes the distribution of income more unfair. When the income of the middle class and the poor remain unchanged, the inflation rate can lead to a serious decrease in purchasing power, reduce the level of real purchases of goods and services, and impose recession on the economy due to the fall in real demand.
