The prices of essential Contemplates goods increased sharply when the subsidized import policy was repealed in May 2022. As a result, high rates of monthly and year-on-year inflation were registered in June and July 2022. Other factors also contributed to inflation, leading to the second peak of YOY inflation in a year; in March 2023, the inflation stood at 64%. Abdolnaser Hemmati, the former head of the Central Bank of Iran, prefaced his write-up for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
First, higher money printing, especially in the second half of the fiscal 2022-23, can intensify the growth of liquidity and inflationary expectations. The monetary base is estimated to stand at 2,200 trillion rials [$4.4 billion], registering an increase of 36% by March 2023. That’s a very high increase in terms of the annual growth rate of money amid inflationary expectations. Thanks to the continuation of the restriction imposed on the banks’ balance sheets, which became operational and gradually stabilized in 2020-21, as well as the increase in the legal deposit of some banks at the end of 2022-23, the acceleration of liquidity growth decreased but this does not mean that the growth of monetary base will not have an impact on the economy and inflation.
Second, the increase in inflationary expectations arising from the economy’s linkup with nuclear negotiations via news therapy on the one hand and the developments and protests of the second half of the year on the other hand, along with the growth of monetary variables, led to a rapid growth in the share of money in liquidity (up to 25%). The whole thing translated into a sharp decline in the interest of people in keeping local currency and increased speculative practices in the asset market, including foreign currency, which played a main role in injecting turbulence into the markets.
Third, changes in the foreign currency market and their impact on the prices of goods and assets, large-scale import order registration that was higher than the Central Bank’s ability to supply foreign currency, due to sanctions and the absence of oil export revenues and a significant part of non-oil export income put ample pressure on the exchange rate and drove it up by more than 80% within a year and fueled the flames of speculative demands.
Key Measures to Curb Inflation
Some key measures can be taken to curb inflation in the new Iranian year [started March 21]:
Interactions with the neighboring countries and the world, which have started recently and led to agreements within a practical framework is the most important move. This will increase the government’s oil revenues and can prevent the widening of budget deficit that is the most important factor in the government’s financial dominance over monetary policies.
Strict, uncompromising supervision and control of the banking system, especially those that are not financially stable, is important. Banks’ overdrafts, accompanied by repurchase agreement deposits, have reached a whopping 3,500 trillion rials [$7 billion]. This undoes all measures to control inflation, so a solution should be worked out at the national level as soon as possible.
Revising the budget approved for the fiscal 2023-24 by eliminating and cutting unnecessary expenses can reduce the possible budget deficit for the year and its supply through the creation of liquidity.
Regulating the registration of import orders based on the ability to supply foreign currency in the timeframes set by the central bank. This will control the demand pressure on the free market. The CBI intervention should be done at the margin of the market price. Trying to supply foreign currency at a price far lower than the open market price leads to more turbulence and increases the exchange rate. It will also lead to the distribution of rent and wastes foreign exchange reserves, as was the case in the past months.
Paying attention to national understanding to prevent any political, social and cultural tensions is important. The country needs peace more than ever. Calm and stability are prerequisites of reducing negative inflationary expectations and productive investment. Any measure that compounds social tension, negative expectations and capital outflow should be avoided.
