Economy, Domestic Economy

Rouhani’s Prize Slipping

When Rouhani took office, inflation was over 34%, and the economy was shrinking at a near six percent rate.When Rouhani took office, inflation was over 34%, and the economy was shrinking at a near six percent rate.

One really wonders how to describe a country going through a currency devaluation and high inflation. You lose all notion of value. It is really hard to grasp 30% inflation and its effects from a seat in developed economies where consumer prices barely rise. Those who lived through the great depression know how it is like. But few from that generation are anywhere around.

When the consumer price index is of the ascending order, you are forced to update the price of everything regularly in your head. Expensive and cheap lose meaning. You go to the local shop for groceries and you end up with a bill twice as large as a month before.

You turn on the TV and the news is telling you all is well and the central bank is not publishing inflation figures anymore.

You get quotes from electronics store for the new camera you had saved up nine million rials for, and you realize its price has gone to 15 million since last month. You cannot plan the future, budget or do business in such an environment.  Hassan Rouhani ended that chaos in Iran.

During the currency crisis that ensued after the tightening of sanctions against Iran's nuclear energy program in 2010, the inferno of inflation spread far and wide.

The government had injected windfall oil revenues, brought about by record crude prices, into the economy during the 2000s.

Much was squandered on unfeasible and senseless projects and policies. Many central bankers at the time thought an increase in money supply brought growth. Curbing inflation was just an afterthought.

As the economy got out of hand elections arrived and the first order business for the president was to rein in inflation. When Rouhani took office in mid-2013, inflation was over 34%, and the economy was shrinking at a near six percent rate.

A combination of fiscal discipline and prudent monetary policy led to inflation's continuous decline during the past three years. Of course recession in the real economy and low global inflation has aided the government.

Consumer prices started decelerating in May 2013. It took inflation two years to fall to a record low.

Inflation in the rolling 12-month ending June 20, which marks the end of the Iranian month of Khordad, dropped to 9.7%, the Central Bank of Iran reported. It was the first time inflation fell below the 10% mark in 26 years. The last time was in 1990, when Iran was emerging from the carnage of the brutal Iraqi-imposed war.

The latest inflation for the 12 months ending Aug. 21, showed an 8.9% rise in consumer prices. We are below nine percent.

But year-on-year inflation, considered by many as the canary in the mine for average inflation has started rising since it bottomed at 6.8% in Khordad.

 It has continuously gone up hitting 9.4% for the month ending Aug. 21. That means inflation will climb in the coming months.

The central bank is monitoring these developments closely. It has continuously pushed for lower interest rates from lenders in the market in line with falling inflation. Why? Because Iranian businesses are short of cash flow and customers; and to revive demand and solve the overdue debt crisis in the financial system lower rates are required. As a result of the CBI efforts major lenders cut one-year deposit rates to 16% this summer.

The bank has had to balance its efforts to curb prices with its acts to help increase economic output. The recent climb in year-on-year inflation may be an alarm for the bank that a limit has been reached. The bank may have to tighten monetary policy or let inflation continue its rise.

While many are pushing for more government action for fostering growth, the stability brought by low inflation is too precious to throw away. It brings predictability and trust back to the economy and paves the way for business investment. Chaos must be averted at all cost.