Iran's economy has been a frontrunner in registering chronic double-digit inflation in the world over the past four decades, which indicates that it is a structural problem in the country.
In order to curb inflation, measures are needed to reduce and eventually eliminate structural factors that trigger inflation. Let’s remember that production growth is impossible without reducing inflation and stabilizing it at low levels. In the absence of inflation reduction over medium- and long-term perspectives, which are necessary for analyzing the justification of investment and realization of capital accumulation, are not possible, Hossein Bazmohammadi, a Central Bank of Iran advisor, prefaced an article for the Persian economic daily Donya-e-Eqtesad with this note. The translation of the full text follows:
High and unstable two-digit inflation makes the ad-hoc approach to investment to prevail and intensify speculative activities that have shorter returns. In the absence of capital formation, the infrastructure of production and employment weakens, giving rise to various economic, social and cultural problems. So, what are the main structural factors of inflation in Iran's economy?
If we examine the trend of macroeconomic variables in the last four decades, we will notice the disproportionate growth of monetary and liquidity base variables with the growth of production in the real sector of Iran's economy.
During the last four decades, the average annual growth of monetary base and liquidity has been about eight times the average annual growth rate of real production.
Budgetary, Financial Indiscipline
A look at the balance sheet of the Central Bank of Iran and the banking network during the same period will show the two main reasons for the high growth of monetary and liquidity base variables: the continuous increase in the debts of the government and the public sector to the banking system, and the incessant increase in the debts of banks and credit institutions to CBI, which have been the main reasons for the unwanted and disproportionate expansion of the volume of money in the Iranian economy.
Of course, in years when the price and income from oil sale have been favorable, the increase in the net foreign assets of the central bank was the main reason for the growth of monetary base.
Here, we also attribute the unwanted rise in CBI’s net foreign assets, which occurred due to the purchase of government-owned foreign currencies, to the government's budgetary dominance.
In economic literature, the unplanned rise in monetary base, due to the financing of the government's budget deficit, or the financing of the liquidity deficit of banks and credit institutions, implies the financial dominance of the government or institutions over monetary policy.
The budgetary indiscipline of the government and the financial indiscipline of banks and credit institutions, along with the political considerations and interests of certain groups, cause the continuation of this unruliness and the marginalization of monetary policy.
Extra-Budgetary Expenses
It is possible that part of the reason for the liquidity deficit of financial institutions and the increase in their debt to CBI is also due to the imposition of the government's extra-budgetary expenses on banks and credit institutions. For example, the burden of financing the Social Security Organization's deficit, bankrolling municipalities and supporting the guaranteed purchases of agricultural products, or government-mandated loans is imposed on the banking network every year in accordance with the budget rules.
Since banks and credit institutions have to service these facilities, in addition to their projected expenditures, they resort to overdrawing from their current account with CBI, in violation of regulations. However, financial indiscipline, granting facilities to affiliated parties, mismanagement and the extensive purchase of immovable property also contribute to the chronic liquidity deficit of some banks and credit institutions.
These could be considered the main structural reasons for the lingering inflation in Iran's economy. Reducing the influence and the gradual elimination of the above two types of financial dominance is key to curbing inflation.
Budget Amendment
The president’s pursuit of an amendment to the budget law this [Iranian] year [started March 21] to realize the slogan of “curbing inflation and boosting production” is a wise move.
The approved figures of the government's general budget this year have grown by nearly 45%, which growth in budget resources and expenses is not right for a country that intends to check inflation.
According to my estimate, about 20-25% of public budget expenditures should be reduced. At the same time, the budget resource items should be estimated more precisely.
Of course, the reduction in expenditures cannot include the reduction of salaries and wages paid to government employees, because the 20% increase in the salaries of government employees in the current fiscal year [March 2023-24] is far lower than the inflation rate realized in the previous fiscal and the minimum inflation rate projected for this year.
Moreover, the purchasing power of government employees has decreased by 50% on average in the last four years. Therefore, reducing their maximum purchasing power is not recommended. Instead, lower-priority expenditures should be eliminated from the government’s general budget.
In order to succeed in curbing inflation and reducing it to low and stable levels, as the first priority of economic policy for this year and the next, the government must adopt a policy of strict and lasting financial discipline.
Meanwhile, in coordination with the financial policy, the CBI monetary and supervisory policies should be focused on increasing the financial discipline of banks and credit institutions and determining the tasks of non-performing banks and financial institutions. In short, there is no way other than handing over the management of the CBI balance sheet and the banking network to them (for ending their budgetary and financial domination) in return for increasing their responsibility and accountability to reduce inflation to low and stable levels.
