During his recent visit to Washington to meet the officials of the International Monetary Fund, the Central Bank of Iran’s Governor Mohammad Reza Farzin spoke of a plan to reduce inflation to 30% by the end of the current Iranian year (March 2024).
Is it possible to achieve this goal under the current circumstances? The 30% inflation is likely only on certain conditions. It is possible for the economy to register 30% inflation if sanctions are removed, agreements produce desirable results, Iran’s foreign exchange reserves and oil income are restored and the economy does not experience an inflationary shock from a hike in energy or goods price in the current year. But the important point is that it will be tough for the policymaker to further reduce the inflation rate after the initial reduction.
Reducing long-term structural and average inflation is not an easy task and has nothing to do with sanctions, as the government needs to introduce institutional and structural reforms to succeed, Kamran Nadri, an economist, prefaced an article for the Persian economic daily Donya-e-Eqtesad with this note. A translation of the text follows:
Interest Rates and Ideological Issues
The interest rate is one of the policy tools proposed by economic experts for controlling inflation.
However, reforms such as changing the interest rate are secondary moves; the policymaker should first fix the structural flaws and then proceed with the modification of policies. In other words, we do not have the condition to employ tools such as interest rate in the Iranian economy. Such policies should be implemented by the central bank and in the long run.
In addition, we have ideological problems with structural reforms, institutional changes or strengthening institutions. The issue of interest rate has yet to be solved in terms of ideology in the current economic environment.
Ideological changes must take place in our economy and policymakers need to determine where they stand with the modern economy. If they are willing to solve the interest rate issue in a radical way, they need to change their attitudes at the governance level.
The issue is not as simple as removing sanctions because sanctions can be resolved through negotiations, flexibility and by backtracking from some positions, while structural reforms and attitudinal changes cannot be realized easily; it takes time and painstaking planning.
To start with, it is necessary for the society to be open to all thoughts and ideas.
*** Time-Consuming Reforms
Reforms will take time and are not even conceivable with the people currently in charge; perhaps they could materialize when a new generation of decision-makers with open minds come to power.
All things considered, this work will not be easy; cultural and political changes are preconditions for realizing this goal.
Achieving 30% inflation is possible, but it depends on the above-mentioned conditions.
If we intend to determine a starting point for these reforms, we should begin with the Iranian Constitution, as some of its articles have fundamental flaws in matters related to ownership. For example, we need to work out a solution for some properties that are not owned by the government and are semi-governmental.
These issues pose serious obstacles to economic reforms, so it is necessary to set the stage for the growth of the private sector. In fact, these reforms will not be possible unless the government’s interventions in the economy are minimized and the policymakers need to move toward scientific and minimal management. These examples are just a few of the proposed reforms that are easier said than done.
Opinions that have been formed regarding interest rate over the past 40 years cannot be changed overnight. In view of such wrong attitudes, state institutions are lagging behind the world and so we cannot expect miracles.
Now that the business environment is unfavorable and the administrative system is inefficient and hit by corruption, countless measures need to be taken for achieving a reasonable economic growth in the long run. At the same time, some price increases are inevitable in the years to come.
How long will the government be able to supply gasoline at the price of 30,000 rials [about 50 cents] or 15,000 rials [for the monthly quota]? The allocation of subsidized dollar at the rate of 285,000 rials [for importing certain goods] is another example. These factors need to be tackled for stabilizing inflation next year.
Internal Issues More Pressing Than Sanctions
Also note that internal problems are much more important than sanctions. As a myriad of wrong measures have been taken to tackle sanctions, it will take a lot of time for these mistakes to get fixed.
We should not forget that there are people who benefit from the current situation and they will eventually hinder the implementation of reforms; the so-called “sanction traders” have gained economic power thanks to sanctions and they will definitely create problems in the future.
I didn’t mean to present a bleak picture of the country’s economic environment in this write-up; if senior officials intend to carry out these reforms, they will be able to do so on the condition that they discard their old ideologies and improve the atmosphere of the society. It is vital to have an open mind and allow those who have the knowledge, ability and competence to take the reins of affairs.
We have human resources that have been marginalized. These people, if given the opportunity, can offer better solutions to the crises we are facing today.
Even if we don’t take into account the developed and advanced countries, Iran is significantly behind even the neighboring Persian Gulf states, such as Saudi Arabia and Iraq, in many ways. But we are hopeful, as we have efficient human assets, both inside and outside the country. It is necessary to note again that under the current circumstances, reaching 30% inflation is contingent on lifting sanctions and it will be realized provided that the government does not experience a new inflationary shock in the fiscal 2023-24.
