Economy, Domestic Economy

Taming Inflation

Taming Inflation
Taming Inflation

The main responsibility of the Central Bank of Iran (CBI) at the present time is to “overcome the galloping inflation inherited from the former government”, President Hassan Rouhani told in the 54th meeting of the general assembly of the CBI held on Monday. It is necessary to curb the inflation to a single-digit rate during the next Iranian year, Rouhani added.

Iran is an oil-rich country, ranked third largest in the world. In spite of the wealth streaming by the oil revenues to the Iranian economy, the comfy oil-based income has become an obstacle to economic growth and industrialization process of the country. The combination of economic mismanagement and lack of determination by most of the Iranian governments, oil revenues turned out to be the main reason for a continuous high inflation.   

High inflation was first brought to Iranian economy (since the beginning of the modern era on 1925) by the World War II when the country was invaded by the allies’ armies. The consequences of such invasion were catastrophic; insecurity and hunger spread all over the country. Inflation began to increase on 1320 (1941-42 in Gregorian calendar) and kept its upward direction until reaching its all-time record of 110 percent on 1322 (1943-44).

Early 1350’s (from 1971 to 1981) are the next extreme point for inflation rate. The oil market demands and price boomed. Thus, the oil revenues of Iranian government rose up to seven times more than the last years of 1340’s (from 1961 to 1971). Despite the economists’ view and suggestions, Shah injected the oil revenues to the government’s current budget and triggered another round of high inflation that continued till present time. The inflation rate rose up to 25% on 1356 (1977-78). Afterwards, Shah never had the time (Islamic Revolution led to Shah’s overthrown on 1979) to compensate his mismanagement in turning the oil revenue into high inflation rate.

Over the past 40 years, several administrations tried to curb inflation rate and stabilize the economy but to no avail. Former president Akbar Hashemi Rafsanjani (in office from 1989 to 1997) caused another extreme point in the inflation rate graph by adopting expansionary economic policies. In 1374 (1995-96) Rafsanjani government recorded the second highest in history by inflicting a 49 percent inflation rate on the Iranian economy.

The third place, of course, goes to former president Mahmoud Ahmadinejad government (in office from 2005-13) with an inflation rate of 35 percent in year 1392 (2013-14). Besides all the mismanagements that took place in his government, Ahmadinejad forced the CBI to print a significant amount of Fiat Money (currency that is intrinsically useless product and derives its value from government law), which is known to be the main reason for inflation during his administration.

Ahmadinejad “administration is responsible for 44 percent of the total currency created in the history of Iran”, Rouhani said on Monday. Rouhani also added that “the Ahmadinejad administration spent the fiat money on Mehr housing project” which is assumed to be the main cause behind the significant growth in money base during in his term in office.

Rouhani seems to be determined to accomplish his goal of curbing the inflation rate to create a proper economic condition for growth. Respectively, he assigned this important task to the CBI and asked the bank to remain firm in defeating the inflation rate within a reasonable time-frame.

The CBI has already achieved its target of dragging the inflation to a rate below 20% by the end of year 1393 (March 20th 2015). The inflation rate reduced to 17.8% by the end of Aban (the Iranian month ending on November 21st), so evidently Rouhani is pushing ahead with his next years’ target, which is achieving a single-digit inflation rate.

 Taking into consideration the Rouhani administrations’ success in managing the growth rate of money supply, controlling the volume of high-powered money and improving the financial discipline, analysts and economists are optimistic about President Rouhani’s capabilities in leading the Iranian economy towards a single-digit inflation rate.

If Rouhani manages to defeat the steady inflation, it will be the first time in 40 years. By achieving this goal he will not only stabilize the fragile economic environment but will also be remembered with honor in the economic history of modern Iran.