Iran’s economy has been buffeted by inflationary recession over the past decade. Under the circumstances, conventional anti-inflation policies or anti-recession policies won’t be effective, because resorting to either of them will compound recession and vice versa, Zahra Karimi, an economist, said in an article for the Persian economic daily Donya-e-Eqtesad. A translation of the text follows:
Following the withdrawal of the United States from the Joint Comprehensive Plan of Action, inflation has incessantly hovered around 40% since the fiscal 2018-19 and so containing inflation should take center-stage among the government’s policies. The huge increase in inflation leads to a sharp decline in the purchasing power of people and companies, a serious deviation in relative prices and more uncertainties and risks in the business environment, which inevitably worsens the recession. Therefore, preventing the growth of monetary base and money supply, through strict financial discipline and reducing the budget deficit on the one hand, and applying a contractionary monetary policy and controlling the facilities granted by banks, on the other hand, should be followed by the Central Bank of Iran.
Despite the importance and necessity of controlling inflation, the intertwined economic and social issues prevent the government from adhering to anti-inflationary policies. At present, many large manufacturing enterprises, including carmakers, are seeing a plunge in production and income, and a significant rise in costs.
Over the past decade, they were granted huge loans to avert bankruptcy despite their accumulated, astronomical losses and the inability to repay old loans. Some troubled large companies, such as Esfahan Steel Company, are grappling with their worn-out, outdated machinery and equipment and excess labor force as well as the unreasonably high production costs; they cannot be salvaged by new loans.
The financing of crisis-stricken industries is more justified when we think of the likelihood of labor unrests in the event of non-payment of salaries. Extending financial help to these industries would help postpone the challenge rather than deal with the root cause. As time passes, the challenge of decrepit and loss-making factories with their surplus labor force gets bigger and costlier.
Impact of Falling Investments
Investments in Iran have declined by more than 40% between 2011 and 2020; therefore, the reduction in per capita labor force `is more than 50%.
From the fiscal 2018-19 up until now, the depreciation of investment has outweighed the level of investment. The continuation of this trend will accelerate the depreciation of the country’s infrastructures, machinery and equipment in the years to come.
Uncertainty about the future has led to a significant decrease in private investment; the sharp decline in oil revenues has affected government investment and the production sector.
Raising the salaries of government employees and pensioners, from the military and law enforcement to teachers, will drive up government expenses and trigger the growth of monetary base and money supply. Political-economic considerations resulting in the increase of wages have forced the government to ignore the necessity of adopting anti-inflationary policies.
The jump in the prices of gold and foreign currency, coupled with soaring budget deficit, is a vicious cycle that leads to the continuous rise in prices and inflationary pressures. All in all, the policy of financing crisis-stricken industries by granting huge loans will definitely fuel the flames of inflation. Meanwhile, the problem of outdated, non-competitive industries and households’ low purchasing power remain unresolved.
Clearing hurdles in the way of production, including the removal of trade barriers, boosting foreign-source earnings, enhancing the transfer of new technologies and advanced machinery and materials to expand production capacities, will help the country exit inflationary recession. Establishing a stable environment for business, the government’s compliance with financial discipline to avoid budget deficits, not introducing constant changes in rules and regulations, improving competition, reducing corruption and removing unnecessary administrative obstacles for investors are among preconditions for achieving this goal. It is not possible for the government to carry out these measures single-handedly; their actualization relies on the will of decision-making institutions.
