One of the accomplishments of President Hassan Rouhani is now in grave danger. Galloping inflation, which reportedly dropped to single figures in June after a quarter century now appears to prove a short-lived dream. Money supply has surged again, government debts to banks and the central bank have soared and the share of short-term deposits from total liquidity–which has now surpassed 10 quadrillion rials ($327.3 billion) – has crept up.
In its board meeting earlier this month, Tehran Chamber of Commerce, Industries, Mines and Agriculture expressed concern that inflation, now at 9.4%, would again relapse and descend into the bad old days.
According to TCCIMA, in the first quarter of the current Iranian fiscal ending June 20, government debt to banks rose by 160 trillion rials–a hike destined to leave its mark on the monetary base. Broad money supply also grew by 4.5% year-on-year during the period. Put together, all of this point only in one direction: rise in inflation.
Indeed, signs of higher inflation are already visible; since June 20 year-on-year inflation, considered to be a harbinger for average inflation, has started to lean continually on the upward trajectory.
But not everyone agrees that inflation is just about to shoot up, not least the Economy Ministry. On Tuesday it declared its forecast for the second quarter: 8.9%. Some analysts concur. In an opinion piece in the local media last week, Mehdi Taghavi, an economist, dismissed fears of an inflation rebound, arguing in no uncertain terms that the prevailing system of supply and demand would take care of that. He went so far as to claim that even inflation is back, there should be little cause for concern because rise in prices would be “worth it if it brings along economic recovery.”
As to the growth in money stock, the analyst believes it would not amount to much since the negative growth of past years has left enough room for more liquidity to be absorbed by the economy. He hoped that the $30 billion in frozen assets overseas, set to be released as part of sanctions relief, can and would offset any negative thrust from rising prices.
Growth Comes First
While there is no dispute that the government should continue to promote monetary and fiscal discipline – a 33% rise in its debts to the central bank in the past year is rather troubling, it needs to rearrange its priorities and let first things come first. In other words, strive to stimulate the economy. Private business and the manufacturing sector in particular can no longer stomach the long and painful recession.
On Wednesday, Kamran Nadri, the head of Islamic Banking at the Monetary and Banking Research Institute said the Central Bank of Iran will stick to its monetary stimulus package. He had no problem with higher inflation-10% or more–as the inadvertent consequence, but said between the two evils of recession and inflation, the lesser is certainly inflation.
Independent think tanks have predicted growth rates ranging between 3.9-6.6%. The government should strive to augment these growth rates with whatever monetary and fiscal tool it can get its hands on.
The CBI, on the other hand, needs to put an end to the frenzy of rate cuts by imposing caps on bank interest rates–which according to some is to blame for the money supply surge.
Back in May, David Lipton, the deputy head of IMF, advised authorities in Tehran to exercise caution and restraint in bringing down interest rates at such terrific speed. “I think it is important to be impatient, not to try to use the bursts of liquidity in order to push the interest rates down further,” the senior IMF official said in a rare visit to Iran.
Lipton insists that lack of liquidity is not the reason for the high interest rates. So it is the CBI’s function to convince the people of the stability of the economy in the long term, institutionalize monetary discipline and stay on the monetary easing course.
