A lingering problem in Iran’s economy since a decade before the Islamic Revolution of 1979, inflation has been fueled by demand pressure, devaluation of the rial, inefficient management of disruptions in the production sector, growth in monetary base and at times the concurrency of these factors.
Governments have taken steps to tackle inflation, for example, by introducing rates for foreign currencies [against the rial] and price controls, and rationing scarce goods, which have had limited success. However, inflation in Iran is impacted by a wide range of economic, political and social factors.
Farzad Javidanrad, a lecturer at the University of Warwick’s Economics Department, prefaced his article for the Persian economic daily Donya-e-Eqtesad with this note. A translation of the text follows:
The causes of inflation in Iran are complex and multifaceted; attributing the inflation to only one factor is not academically acceptable. Over the past decade, foreign resource restrictions, backbreaking sanctions and supply of money unrelated to production have darkened the prospects of inflation management.
Inflation in different periods is indicative of a trend that may help understand the current ambiguous situation, for example:
The 1950s and 60s are known as decades of high economic growth and low inflation.
The 1970s saw the jump in oil prices, which led to a rapid growth in government revenues and public spending which, along with the huge money supply, led to high inflation.
The start of the Iran-Iraq war in the 1980s led to the decline in the local currency’s value, a fall in production and shortage of foreign currency reserves. The country saw a sharp increase in inflation, as the war and its costs, coupled with the sanctions, led to an economic slowdown and a rise in prices.
In the 1990s, the postwar government carried out a series of economic reforms for developing the economy and reducing inflation, but the latter remained high. For example, we saw inflation rates of 35.2% and 49.4% in the fiscal 1994-95 and 1995-96, respectively.
The 2000s witnessed a relative political and economic stability, and a reduction in investment risk for European and Asian companies. Iran experienced a decline in inflation and economic growth over this period, despite the increase in money supply.
In the 2010s, particularly at the beginning of this decade, it became clear that the supply sector and inflation control were highly affected by sanctions and the lack of interaction with major economies. The sharp hike in inflation during this period was not only because of sanctions and reduction of foreign exchange reserves, but also the inefficient and unprofessional management in the political and economic spheres. The economy entered an inflationary recession that was not easy to get rid of.
Three Important Factors
Three factors are worth noting here: First is the role of stability in political and economic relations with influential economies in controlling inflation. Then we shouldn’t forget that the nationalization of many industries and the elimination of the private sector, which were initiated at the beginning of the revolution, compounded the effects of sanctions. After all, the sanctions are much harder on the private sector than on the public sector.
The second factor is the monetary analysis of inflation. The main reason behind inflation is the growth of monetary base. Iran’s chronic inflation cannot be explained using a single monetary base growth model.
Any type of economic, political and social instability that leads to uncertainty has an inflationary shock. The lack of competition and corruption of executive and regulatory bodies are also drivers of inflation. Lack of planning and indiscipline in the government’s budget is both the cause of the escalation and the persistence of inflation. Such factors either create demand/supply shocks and uncertainties, or ensure their prolongation.
Given the semi-independent structure of production sector in Iran, the probability of hyperinflation is very low in Iran. Despite the devaluations, the rial can still be used to produce many items and has exchange value inside Iran. In fact, the rial is a sovereign currency that can be used to produce food, construction materials and chemical products, among others.
As long as the rial has the ability to produce, hyperinflation will not materialize since one of its characteristics is the loss of money’s production capability and the ability to be accepted and exchanged by people. In such a situation, people fail to exchange the sovereign currency and transactions are carried out with the currencies of other countries.
The institution in charge of controlling inflation is the central bank and not the government. Governments the world over are not suitable bodies to control inflation for two reasons:
1. The political motivations of governments to reduce unemployment and complete unfinished projects lead to financial indiscipline and the untimely growth of demand. The government’s dominance over supply fuels demand-side inflation.
2. The government needs to get the approval of the parliament for implementing its policies, which is a time-consuming process. At times, urgent decisions are needed to control inflation and inflationary expectations, which decisions are easily taken by the politically-neutral experts of the central bank.
Controlling Iran’s inflation in the short run depends on the availability of international currencies and their full allocation to production with the supervision of the central bank. The anti-inflationary effects of such a policy will be surprising both in the short- and medium-term. But the continuation of their effects will depend on the policy of the system in interacting with economically influential countries.
Removing all administrative obstacles regarding production, domestic supply and exports will be part of the medium-term inflation control policies. Such a situation is not possible without the presence of economic experts and planners who are not influenced by a particular political ideology in the administration, particularly, the Central Bank of Iran, the Plan and Budget Organization, the Islamic Republic of Iran Customs Administration, the Statistical Center of Iran and other institutions related to production, distribution, exports and imports. This is the same long-term policy that helps reform the structure and performance of the institutions in charge and lifts the burden of toothless price controls from the government’s ambit.
