Iran registered an average inflation rate of 18-20% for a four-decade period. It is an economy struggling with chronic inflation; in fact it has lived through the most chronic form of inflation in the world. There are many reasons showing that economic inadequacies including low economic growth rate and investment rate, dependency on oil revenues and even exchange rate fluctuations all emanate from chronic inflation and the governments’ response to it. Veteran economist Masoud Nili prefaced an editorial for Persian daily Donya-e Eqtesad with this note. Below is a translation of the text.
Statistics show that the first half of 2018-19 Iranian year was a turning point in Iran’s economy in terms of inflation; the country’s inflation regime changed from a relatively constant high inflation (around 20%) to a soaring inflation. According to the Statistical Center of Iran, the average year-on-year inflation in 2018-19 was 26.5%; it was 34% in 2019-20; 36% in 2020-21; 41% in 2021-22 and 48% in the 10 months to January 20, 2023. As you see, the economy has distanced itself from the average inflation of 18.5-20%. Moreover, the new inflation regime has a completely upward trend. In fact, the 10-month rate cited above marks, without a question, the inflation peak of Iran’s economy, after fiscal years 1942-43 and 1943-44. During the past 250 months, the monthly inflation was more than 4% only in 15 months, 12 of these months were from 2018-19 onward, and three of them were in the last 10 months of 2022-23. Year-on-year inflation of above 50% has been recorded only in six months, four of which have been recorded in 2022-23.
The inflation of food and beverages is an indicator of the pressure on the livelihood of the low-income groups as well as the middle class. The year-on-year inflation of food hit the decades’ high of 64.9% in the last month (Dec. 22, 2022-Jan. 20)
The Iranian months ending Nov. 21 and Dec. 21, 2022 and Jan. 20, 2023 were the only three months in which the annual food inflation was higher than 60% (61.3%, 63% and 64.9%, respectively). Note that the increase in food prices in the month ending Jan. 20, 2023 (4.1%) alone was by far much higher than the one-year price increase of the same products in the whole fiscal 2017-18 (3.6%). The food and beverages inflation increased by 43% over 48 months: from March 2014 to March 2017. This comes as the food inflation has grown 48% in the past seven months, i.e., the food inflation imposed on people in seven months was more than that of four years.
Above mentioned statistics are enough to make one uneasy. I’ve been concerned for the past few years about the dangers of very high inflation. These concerns will worsen when we see that government officials, especially the president, regularly express satisfaction with what they call significant reduction in inflation compared to last year while the published official statistics prove otherwise.
Risk of Hyperinflation Looming Large
As I have mentioned many times, when the inflation rate is in very high ranges, just like the current situation, no one can predict the medium-term future of inflation or whether there will be another turn in the direction or not. However a look at the experience of countries that have fallen into the trap of hyperinflation shows that it all happened very fast. Take the example of hyperinflation in Venezuela: the South American country’s average inflation between the years 2004 and 2013 was 24%. But in 2014, the inflation reached 62%, then in 2015 it hit 120%, then 250% in 2016 and in less than two years it climbed to more than 65,000%. Therefore, we need to take the current conditions very seriously.
Normally, when concerns about inflation rise, it is necessary to follow the path of monetary variables in order to have an image of the factors that create it. As the government officials have stated, they have put in great efforts to reduce the growth of money supply.
According to the Central Bank of Iran, the average year-on-year growth of broad money supply during the seven months from the beginning of the current year was 37.2%, indicating a decrease of 2.6% compared with the average for the corresponding period of last year. The growth in the month ending Oct. 22, 2022, was 34.3%, registering a decrease of 8.5 percentage points compared with last year’s 42.8%.
A more relevant variable that we need to study carefully is what is known as “narrow money”. Money supply has a more comprehensive coverage than narrow money, however since the former is more fluid; it directly reflects the tendency to use broad money in different markets when it increases.
A Very Dangerous Cycle
With inflation being in high ranges (for example, above 40%) and the lack of proper reaction on the part of the banking system, the attractiveness of long-term savings in the banks decreases and economic entities, depending on the amount of financial savings they have, try to convert what they have to other types of assets that increase in price commensurate with inflation or even more (such as foreign currencies and gold) or to durable goods (such as real estate and cars). This leads to financial savings being kept in the form of current accounts in banks so that they can be deposited/withdrawn quickly and easily.
When this cycle is at work, the prices of foreign currencies, gold, real estate, and cars increase significantly and more people tend to convert their money into these types of assets, which again leads to more increases in their prices. When a large number of people enter this process, the risk of such a move lowers. This is a very dangerous cycle. It has in fact given rise to three major currency crises in Iran in less than five years. Therefore, when inflationary expectations are high, money supply will gradually gain momentum, which means it becomes an inflation-generating factor. In short, when inflation increases, more liquidity is held in the form of money, and therefore, inflation increases even more. The cycle is the factor that turns high inflation into hyperinflation. The growth of narrow money in Iran’s economy during 10 years from 2008-9 to 2017-18 was 14.2% per year on average. Meanwhile, the average growth of broad money was 25.1% during the same period.
The annual rate of narrow money growth between the years 2018-19 and 2021-22 jumped 50%. It increased to 56.3% during the seven months from the beginning of the current year (ending Oct. 22, 2022). Note that within the framework of a certain amount of supply growth, people’s decision on how much liquidity to keep in the form of money can be an indicator of the degree of confidence they have in policy makers and the expected climate of the country. It is quite understandable to assume that during the past few months, following the protests inside and the increasing pressure of foreign countries, the growth in narrow money during the month ending Oct. 22, 2022 and later, the statistics of which have not yet been published, cannot have decreased compared to the past. If so, it is necessary to take urgent measures to prevent the inflationary path of no return. I stress that the growth of narrow money up until recent years was more than 50% in only two fiscal years of 1974-75 and 1978-79.
State of Emergency
Therefore, the economy is in a state of emergency. The picture of fiscal 2023-24 budget, grave mistakes in the new currency policies in terms of re-establishing a rent-generating rate, and worst of all, the ill-thought-out comments of the high-ranking government officials, all unfortunately suggest that they have failed to understand how dangerous the situation is. Government officials seem to be willing to keep themselves in the honeymoon stage of criticizing the previous government; this approach itself shows their very poor understanding of the current situation.
They are unaware of the speed at which adverse developments are unfolding. Instead of engaging in a conflict with a hypothetical enemy of the previous government and declaring victory, the government needs to focus on fighting the real enemy of the current problems. We need to acknowledge that the economy is trapped in sanctions, unscientific policies and the crisis of the lack of social capital; the real pain is that the decision-makers deny all three problems, at least on the surface.
