Domestic Economy

Single Digit Inflation After 26 Years

Single Digit Inflation After 26 Years
Single Digit Inflation After 26 Years

Headline inflation fell below 10% for the rolling year ending June 20, as the Central Bank of Iran's monetary policy stance bore fruit.

Reducing inflation has been a primary goal of the government of President Hassan Rouhani whose efforts are paying off. The president now has a second feather to sport on his hat—the first was striking a historic deal with world powers over Tehran's nuclear program.

This is the first time in 26 years that average inflation has fallen to a single digit, according to sources in the CBI. The last time was in 1990, when Iran was emerging from the carnage of the Iraq-imposed war.          

Urban consumer price index fell to 9.5% for the period, the latest report by the Statistical Center of Iran shows. Inflation in rural parts had already fallen below the 10% mark.

The CBI has yet to release its own report for the period, which may or may not confirm the SCI report. Statistics from the two organizations happen to deviate from each other up to two percentage points.

The government’s efforts to get its finances in order and the CBI’s monetary policy have been instrumental in curbing inflationary pressures. But some economists say near zero global inflation, coupled with recession in the Iranian economy that has hammered consumer spending, are the main reasons for the drop in CPI.

  Slow Recovery

Rouhani inherited a country in crisis. The economy was tanking while inflation was unchecked.

In the Iranian year ending March 20, 2014, when Rouhani took office, inflation was over 34% and the economy shrank nearly 6%. The rial had already lost 70% of its value during the currency crisis in the past two years, central bank data show.

Today, the rial is 10% stronger, while inflation is falling to historically low levels and growth is returning. Following the economic recovery experienced in 2014, the Iranian economy is estimated to have advanced at an annual growth rate of only 0.5% during the 2015 Iranian year, according to the World Bank.

However, recovery has been slower than expected.

“This performance came in spite of the signing of the Joint Comprehensive Plan of Action in July 2015 and the significant economic prospects it offered,” the World Bank reports.

Iranian banks have been ill-prepared for reconnecting with their global peers. Most are in a dire financial situation, with enough overdue debt to put their solvency in doubt.

Moreover, they have yet to get up to speed on international regulations and business practices.

On the other side of the isle, European and Asian banks remain reluctant to do business with such partners, given their fear of punishment from the US Office of Foreign Assets Control for breaking remaining US sanctions on grounds unrelated to Iran’s nuclear program.

Large swaths of the economy are in the hands of quasi-state organizations. Due to complex ownership structures, it is hard to determine whether you are violating sanctions when doing business. So, most Europeans are avoiding all the trouble for now.

A chain of expensive lawsuits into European banks in the past five years against sanctions violators has put them on guard.