Over the past half a century, the Iranian economy has been wrestling with inflation, though internal and external factors have doubled the inflation rate in the past decade.
The inflationary boom in some periods has apparently helped the growth of some markets, but in general, it has lowered production by reducing the financing power of producers. As a result, reduction in production and supply has aggravated inflation in the domestic market by disrupting the relationship between supply and demand, Abolfazl Roghani-Golpayegani, a member of the Iranian Chamber of Commerce, prefaced a write-up for the Persian economic daily Donya-e-Eqtesad with this note. A translation of the text follows:
Studies show that the average inflation in the past 50 years, including the few years that experienced single-digit inflation, stands at 20%. This figure has doubled in the last five years, thanks to the exertion of various shocks and tensions and Iran’s economy is currently posting an average inflation of 40%.
Besides its long-term consequences for production (weakening production base and output), as well as non-competitiveness and technological backwardness of industrial and production units, inflation has created a serious challenge in the current limited scale of production in the short term.
As indicated by the Purchasing Managers’ Index and the data published by the Research Center of Iran Chamber of Commerce, Industries, Mines and Agriculture, the Purchase Price Index of raw materials has started rising in the recent inflationary conditions, which will directly increase the sales prices of the final product. But according to economic players, the growth in selling price has not kept pace with the rise in production costs due to the lower demand in the market. As a result, economic enterprises have seen a sharp drop in profit margins and weaker financing power.
In the PMI report of the month ending March 20, the Purchase Price Index of raw materials increased sharply compared with the month before, reaching a 10-month high of 87.61. At the same time, the rise in costs has driven up the Sales Price Index of manufactured products and services to 69.94, which is again the highest in the 10-month period.
Economic players believe that due to the decline in market purchasing power and demand, it was not possible to extend the entire inflationary effects of raw materials in the final product, and the producers, like in previous months, were forced to lower prices to maintain sales.
The continuation of imbalances in the supply of raw materials and the sale of manufactured goods and services has reduced goods and services needed by the market. Uncertainties in the macroeconomic environment have increased demand for the purchase of goods that are turning into capital goods. This is while the current cycle of supply and distribution of raw materials disrupts the ability of producers to plan for more production and respond to the market needs. In the current situation, the producers are not able to compensate all the production costs, given the pricing rules, and on the other hand, because of the decline in the purchasing power of consumers, they are unable to use their maximum production capacity.
The state of the supply of raw materials needed for production is different and producers must meet their needs at rates that are disproportionate to the state of production and sale of goods. This procedure of supplying raw materials, which does not have the necessary transparency, has always ended up in the rentier sectors of the economy and transferred a significant profit from the pocket of the productive sector of the economy to the pocket of the unproductive and speculative sector.
All these issues, besides the cost directly imposed on economic players by the price hike, also increase the end price of goods in the Iranian market without using a part of the production capacity, which hinders the success of inflation control policies.
In order to curb inflation, the restoration of the supply cycle of raw materials and the reduction of costs imposed on producers from this channel should be put on the agenda after implementing structural reforms and facilitating foreign trade.
In doing so, producers will have the choice of planning growth and taming the current turbulent market by meeting demand at fair and realistic prices.
