Undoubtedly, inflation will be the gravest challenge facing Iran’s economy in the coming months, as the government’s smallest error of judgment can lead to an exponential increase in inflation and worsen public livelihood problems, with widespread social consequences.
At present, the economy has become the Achilles’ heel of the country. Therefore, controlling inflation should be considered the most vital issue for ameliorating the people’s economic woes in the short and medium terms because it is directly related to their living conditions.
In metallurgical and materials engineering, there is a term called “fatigue”, meaning that all metal and plastic can withstand all kinds of pressures to a certain extent, but from that point on, they will implode. A significant segment of the Iranian society is suffering from “fatigue” after years of economic pressure and lack of proper management in solving economic, political and social challenges. They can no longer bear more economic pressures and inflation, as their resilience has fallen to the lowest level. The protests of the past months prove this claim.
These were stated by Masoud Khansari, the head of Tehran Chamber of Commerce, Industries, Mines and Agriculture, in an article for the Persian economic daily Donya-e-Eqtesad. A translation of the text follows:
Inflation has become a chronic disease of the Iranian economy. The decline in foreign revenues as a result of the fall in oil income, the budget’s dependence on oil money and the economy’s addiction to the import of consumer and intermediate goods compels the government to borrow from the central bank, which leads to printing more money and increasing money supply. In doing so, the inflation inevitably increases.
The way out of this vicious cycle plaguing the economy for decades is to end the economy’s oil dependence, downsize the government, delegate the work to the private sector, expand export-oriented production and improve the government’s financial and economic discipline.
IMF Study, Solutions
The International Monetary Fund, one of the most reliable financial and economic institutions in the world, has recently published a detailed study of inflation and its roots in Iran, and put forward solutions.
The report notes that inflation has been the bane of Iran’s economy for several decades; it has worsened poverty and social tensions.
IMF lists various contributors to inflation in Iran, including the growth of monetary base. It says each percentage point increase in the monetary base is equivalent to a 0.5% growth in inflation.
Sanctions have also caused the dollar exchange rate to rise, widened the budget deficit and prevented oil exports, which consequently help boost inflation. According to this report, each 1% decrease in oil exports leads to a 0.35% increase in inflation.
Budget deficit also exacerbates inflation, such that a deficit of every 1,000 trillion rials (about $2.5 billion at the current exchange rate) raises inflation rate by 2%. Food, energy and transportation make up 40% of households’ expenses, housing 30% and other expenses 30%, making food and housing expenses the main drivers of inflation.
IMF has recommended the following solutions to reduce inflation in Iran.
A price control policy curbs inflation temporarily, but it suppresses investment and reduces economic growth, compounds poverty and inequality, imposes a heavy financial burden on the government and reduces the effectiveness of monetary policies. Therefore, it is recommended that the price control policy be replaced by a broad and targeted social security system to support vulnerable groups.
Once sanctions are lifted, policymakers need to put a plan on the agenda for stabilizing the foreign exchange rate and facilitate the implementation of economic policies. Should sanctions remain in place, the monetary base reduction policy needs to be carried out through gradual reforms.
The budget deficit should be gradually reduced by eliminating energy subsidies and paying cash subsidies to vulnerable groups.
The government should increase the efficiency of its resources and narrow the budget deficit by fighting corruption and carrying out reforms.
Its expenditure should be financed by increasing tax bases, eliminating tax exemptions, preventing tax evasion and improving the management of public assets.
Education, health and production should improve through investment in green and digital economy, human capital and infrastructures.
Raising bank profit rate and unifying currency rates will help stabilize the forex market.
Structural reforms, participation and development of the private sector, improvement of competition and systematization of business environment should be carried out.
The faults in the banking system should be resolved by giving operational and financial independence to the Central Bank of Iran.
By improving the business environment, removing price subsidies, reducing the number of state-run companies, boosting productivity and reducing dependence on imports, the prices of domestic goods will become resistant to changes in exchange rates and global prices.
Worrying Statistics
In the past 40 years, the average inflation in Iran has been above 20%. Following sanctions and Covid-19 restrictions as well as the mismanagement of the economy, this figure has hovered around 40% since the fiscal 2021-22.
The latest report by the Statistical Center of Iran has put annual inflation rate at 44% for the month ending Nov. 21, up 1.1 percentage point compared with the similar period of last year. Year-on-year inflation rate has reached 48.1%, with those of urban and rural households hitting 47.3% and 52.3%, respectively.
The YOY inflation of food has exceeded 70% in 12 provinces. Sistan-Baluchestan registered the highest food inflation with 84% compared with the same month of last year, which is indicative of the yawning social gap in the society.
Another set of worrying statistics has been published by the Central Bank of Iran regarding money supply and monetary base growth. The CBI report shows that monetary base has outgrown money supply after a year. In the month ending Oct. 22, money supply growth was 34.3% and the growth of monetary base was 34.5%, which indicate that we should be expecting yet another increase in inflation in the coming months.
Besides all these, the appreciation of the dollar against the rial, which started last month and triggered extreme instability in the forex market, given the pessimistic expectations of the market from the nuclear talks and increased tensions with the West and the International Atomic Energy Agency, heralds a further growth of inflation rate in the months to come. It should be noted that that at the beginning of the year, Atikav Center, a monitoring institute affiliated to Sharif University of Technology, had predicted that in the absence of an agreement with the West, the inflation rate could reach a minimum of 68% and a maximum of 79%.
The government has tried to reduce inflation in the country by taking measures over the past one and a half years, including the discontinuation of import subsidies, which measure was important but insufficient.
Iran’s socioeconomic conditions are very complicated and sensitive. Special teams of experts and private sector players should be formed as soon as possible to improve the situation; the country even needs to get help from foreign consultancy institutions to work out solutions to the current complicated problems.
An intensely worrisome situation has overshadowed the economy and public livelihood; it can erupt like a volcano at any moment. We need to reach a solution through consensus and hear the voice of the society before it’s too late.
