How can we sketch the outlook for inflation in the current Iranian year (March 2023-24) and the remaining years of the incumbent government? This is the main topic of many lectures, articles and notes. If we consider inflation as a criterion for review, the last few years have been the worst years of Iran’s economy. Of course, the situation regarding other macroeconomic variables (economic growth, unemployment, economic balance, budget deficit, etc.) is not quite favorable either, Saeed Eslami-Bidgoli, an economist, prefaced an article for the Persian daily Donya-e-Eqtesad with this note. A translation of the text follows:
In this write-up, I am not going to examine the variables of liquidity, monetary base and inflation theories, as these days there have been heated discussions among supporters of different ideas and theories in this regard. However, at the end of the day, statesmen do whatever they want and then look for theories to justify what they have done.
The main topic of this note is to examine the prediction that inflation will not calm down this year and the economic policymaker cannot control inflation.
Inflation was very high in the closing years of the previous government. At that time, Ehsan Khandouzi [the current economy minister] had stated that even if the government does not do anything important, the decrease in inflation will be noticeable. The new government took charge and Khandouzi became the economy minister. However, not only inflation has failed to decline, but broke all records.
Many reasons could be cited for the government’s failure to control inflation, but undoubtedly, some of the most important reasons include people’s low trust in economic policies, uncertainty about the future and inflationary expectations among economic players and different strata, which factors create many challenges for the implementation of correct policies.
In a situation where the high rate of inflation and lack of economic stability have caused widespread dissatisfaction, policymakers will look for short- and long-term solutions to reduce inflation and improve the situation, but public distrust in policymaking creates difficulty in implementing effective policies.
Pressure Tools Will Prove Ineffective
Here, resorting to pressure tools will also increase mistrust; that is to say, no matter how much the government promises that the price of foreign currencies, cars and housing will not increase, and no matter how much it tries to ensure the sufficiency of goods to direct capital to productive sectors, people will start buying assets to protect their savings and thereby let whatever the government had done go down the drain to preserve the value of their assets. This is while government policies are all aligned and supportive of each other. If uncoordinated measures are taken, the effect of this mistrust will become stronger.
The many unsuccessful experiences of policymakers have made people more distrustful and shortened the span of the outlook of economic players. In a country that has had high inflation for several decades, the promise of economic authorities about controlling inflation will not have much relevance and not change the attitude of economic players.
Structural Inflation
When the economic structure is intertwined with high inflation rates (structural inflation), reduction of inflation will face resistance of power institutions and established structures, and this is a very big problem in the way of implementing reform policies.
For example, in such a situation, you cannot reduce the budget deficit by modifying the budget structure and reducing unnecessary budgets. This will again discourage economic players about the implementation of reform policies, as they argue that if there was serious determination, the budget would have been amended.
High inflationary expectations per se is a trigger for the realization of high inflation rates. Reduction of these expectations requires clear measures rather than slogans and promises. People will appreciate the serious determination of politicians to correct wrong procedures when they sacrifice the interests of affiliated bodies for fundamental reforms and show the necessary persistence for implementing those policies.
Building trust is a long-term process, especially since this trust has been damaged over the past many years. Without building this trust, economic reforms will be difficult and face a path full of challenges.
Intro: In a situation where the high rate of inflation and lack of economic stability have caused widespread dissatisfaction, policymakers will look for short- and long-term solutions to reduce inflation and improve the situation, but public distrust in policymaking creates difficulty in implementing effective policies
Highlight: Many reasons could be cited for the government’s failure to control inflation, but undoubtedly, some of the most important reasons include people’s low trust in economic policies, uncertainty about the future and inflationary expectations among economic players and different strata, which factors create many challenges for the implementation of correct policies
