Iran’s economy is not doing well and its prospects are not promising either. Year-on-year inflation rate has increased from 34.7% to 48.1% and the rial’s exchange rate against the US dollar has surged from 262,000 rials to over 360,000 rials in less than a year.
These tweets were recently posted by the former governor of the Central Bank of Iran, Abdolnasser Hemmati.
Davoud Souri, an economist, also described the current state of the economy in an editorial for the Persian daily Donya-e-Eqtesad.
“The inflation rate of 48.1% simply means that last year, almost half of the work and money of every Iranian has been taken covertly from their pocket by the government, in addition to the taxes and duties collected directly,” Souri said.
“We say the government because inflation is nothing but the outcome of the monetary and financial policies of the government. We say covertly because the government did not ask for the permission of the owner of the property, i.e., the people.”
And he is not the only economist to have painted a dismal picture of the future of the economy.
On the one hand, the latest international development indicates that the last opportunity to revive the Joint Comprehensive Plan of Action (aka the Iran nuclear deal with the six world powers) and remove sanctions is being missed out and the government has to put together next year’s budget without the needed resources.
On the other hand, a recent argument between the head of the Plan and Budget Organization and the parliament speaker showed that contrary to the remarks of the economy minister, the budget deficit continues to bloat and despite the hopes pinned on nuclear negotiations, one-third of the current year’s budget (fiscal 2022-23) has not been realized, the Persian daily Shargh reported.
Next Budget in Deadlock
Morteza Afqeh, an economist, said the government has exhausted all avenues and does not even have the resources it had last year.
“The government had focused on the sales of bonds to tackle the budget deficit of fiscal 2022-23 in a non-inflationary way, but when inflation exceeds 40% and government bonds yield 20%, it is only natural that people won’t buy bonds. So this source is not dependable,” he said.
“An increase in taxes was also attempted, but currently, the national production and people’s income have declined. Tax is a component of the national production, so tax revenues fall when production declines, so the addition of new tax bases is not helpful either. If something were left of tax income, the government used it all this year; the government is unlikely to have this source next year.”
According to Afqeh, if the sanctions remain in place, not only is the outlook for inflation negative, but the continuation of the government’s misguided policies will also fuel the flames of recession.
“Iran is facing political tension and instability with other countries. Under the circumstances, the only option is for the government to increase the prices of goods and services, such as the price of gasoline. In the current situation and as previous experiences show, the measure will only compound the situation. The decline in the welfare and livelihoods of people is inevitable,” he said.
The latest data released by the Statistical Center of Iran show food inflation is above 60%.
Wrong Policies Led to Recession
Afqeh noted that if the government wanted to control inflation, it should have arrested the increase in money supply, but unfortunately government officials and lawmakers insist on reducing money supply without stemming its origin.
“As everyone knows, the budget deficit is the main source of money creation. The budget deficit itself is the product of high, unnecessary expenses. Instead of thinking about reducing its expenses, the government tries to generate revenues to pay its expenses, and this leads to a chronic budget deficit. Of course, reducing expenditure takes time; some people have been fed from this money for years, especially the numerous big-budget cultural, ideological, educational and research institutions run by influential people over the past two decades,” he said.
“Such a scenario would be helpful in the medium term. In the short-term, however, if sanctions remain in place, the government will be incapable of containing the inflation. If the government insists on reducing money supply with the available tools, it may only be able to control inflation by 1-2% at the cost of imposing recession and unemployment on the economy. The result of both would be nothing but poverty and inequality.”
Other economic experts have also referred to the reduction of budget expenditure to narrow the deficit. Mehdi Pazouki, another economist, believes that Iran’s budgeting system suffers from financial indiscipline.
“Research institutes handle parallel tasks. The expenses of institutions such as the parliament or the Guardians Council multiplies several times every year. The budgeting of these institutions, which is the result of a populist agenda, can be overhauled,” he said.
Inflationary Expectations
Esfandiar Jahangard, an economic expert, also believes that there is currently no positive perspective regarding inflation control.
“The uptrend in inflation will continue; a change must be introduced to control inflationary expectations in the economy, but at present the forex market is in turmoil and prices of goods and services increase by the day. The government has also proposed a bill on raising wages. This does not appear to be helpful for containing inflation. Budget is one of the main channels through which inflation goes up because the government’s financial policies dominate its monetary policies,” he said.
“This dominance can be reduced in the budget, which won’t be possible in the short run. At present, the society does not expect to see an opening on the supply side of the economy because our oil exports have decreased and commercial ties with the world have not improved. These are all fueling inflation.”
Jahangard said productivity is another key issue that cannot possibly be increased in the short run.
“The demand side of the economy is suffering from recession, so the government has no choice but to improve people’s income and purchasing power. Therefore, if the government fails to make an improvement in its foreign-source income, a decline in inflation would be unlikely,” he added.
“Figures show that the government’s approach has not worked so far. In the absence of foreign currency income and sustainable jobs, inflation will not be easily controlled. The government carried out some policies, but in practice, they were ineffective. It is necessary to have foreign-source income to increase employment, production and productivity, and control inflation.”
