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Challenging Path to  Single-Digit Inflation
Economy, Business And Markets

Challenging Path to Single-Digit Inflation

The 25th Annual Conference on Monetary and Exchange Rate Policies was held in Tehran, focusing on solutions to the chronic inflation the economy has been suffering from in the past few decades.
Top monetary and financial officials attending the two-day confab believe that single-digit inflation is a stretch target; however, they admit that a bumpy path is on their way to further curb inflation.
The average inflation rate in the past decade was 20 percent, though it is now hovering at 15 percent. Both Governor of the Central Bank of Iran Valiollah Seif and Minister of Economy Ali Tayebnia say drawing inflation under 10% is more challenging and that the government needs to apply different tools from those used in the past to address the problem.
The officials see the lack of a unified exchange rate system as a major deterrent to single-digit inflation.

Seif on Sunday announced measures for adopting a unified exchange rate regime for when the “unjust western sanctions” against the country are lifted and the international relations of Iranian banks return to normal.
He said his bank has set the stage to implement a unified exchange rate in an optimal and controlled manner when the time is ripe.
“To fulfill the decision, the CBI has embarked on a series of reforms to regulate the currency market and gradually close the gap between the official and unofficial exchange rates to prevent the incongruous accumulation of foreign currency with an eye on the economy,” Seif said, addressing officials and monetary and finance experts attending the conference.
To protect the market against currency shocks, the CBI announced an “official rate” for the US dollar back in 2011, which was agreed to be 12,260 rials. The bank even launched an “exchange transaction chamber” a year later to calm the tumult in the currency market. However, the measure did little to stabilize the market and the use of “official rate” never actually caught on, not even finding a place in official transactions.
Although the gap between the official rate and the market rate has narrowed since the launch of the exchange transaction chamber, the free market greenback is traded at roughly 5,000 rials higher than the official dollar.  
The CBI governor said the average nominal rate of the dollar in the previous year (ended March 20) was 32,800 rial which saw a low 3% increase compared to a year before, highlighting that the market volatility had been at its lowest.
During the 2012 currency crisis, the rial lost almost 70% of its value against all major foreign currencies.

 Anti-Inflationary Campaign
The focal point of the two-day confab is to discuss the institutional requirements to accomplish “stable single-digit inflation,” which has been the holy grail of an economy plagued by high inflation over the last couple of years.
The top monetary policymaker noted that the “stability and sustainability” of the economy -- which is a pillar of the Resistance Economy doctrine -- was the linchpin of CBI’s program. He said all CBI policies during the past year have revolved around the essential premises of Resistance Economy.
Resistance economy is referred to a set of guidelines announced by Leader Ayatollah Seyyed Ali Khamenei, urging officials to adopt policies to make the national economy less reliant on oil revenues and more dependent on internal resources and knowledge-based industries.
“A major goal of the CBI has been to instill stability to the market which is both important to manufacturing and principles of Resistance Economy,” he maintained. Seif added that the decline in inflation from 19.1% last year to 15.5% in April has been a consequence of such policies.

 Defining Moment
Addressing the conference, Tayebnia took the podium to deliver his remarks about the battle against inflation. He argued that since achieving single-digit inflation requires special circumstances, addressing economic woes should be at the forefront of policies.
“Although the inflation rate has fallen to 15.5%, which is an accomplishment per se, we are still far from the desirable situation,” the minister said. “Most countries have achieved single-digit inflation since a low inflation rate with minimum volatility is the quintessence of a healthy economy.”
Soaring inflation means less manufacturing competition, reduced exports, recession and slow manufacturing. To achieve economic growth, we need a sustainable engine, which is why we are pursuing Resistance Economy.”
He also added that curbing inflation is “our most challenging issue”, which along with the limited state revenues and the end of sanctions, is creating a host of problems and opportunities all at once.
Tayebnia complained that another obstacle in reining in inflation is the “prizewinners of high inflation” whom he said are pocketing many benefits from skyrocketing prices.
The minister said Iran ranked seventh among the countries with highest inflation, adding that in order to secure a spot in the club of 100 countries with the lowest inflation, the country must set its sight on a 5% inflation rate.

 Crude Oil Dependence
The top financial official considered the bane of Iran’s economy the heavy “reliance on oil income,” which had left the economy susceptible to vicissitudes in the crude oil market. He said addiction to oil windfalls has heightened in recent years, reaching 69% in 2008.
To reduce dependence on oil revenues, an increase in bank revenues, tax hike, and effective use of the newly-established National Development Fund would be necessary, he noted.
Whenever oil income plunges due to a price slump, a budget deficit ensues, this in turn increases government debt to the central bank, fanning the flames of inflation. A sharp rise in oil revenues has oddly the adverse inflationary effect since it increases the money supply, the minister said.
Tayebnia also addressed the issue of massive government debts to banks as well as the non-performing loans or NPLs that have plagued the banks, hoping that selling the redundant assets of banks as well as the government repaying its debts to the banking system would remedy the situation.

 

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