Inflation in Iran: A Return to Double-Digit Rates

In early Farvardin of this year, the Central Bank of the Islamic Republic announced that the country's inflation rate had decreased to nine (9) percent in the year 1395, thus, according to the same institution, "Iran has ranked among countries with single-digit inflation for the first time in twenty-six years." The announcement of the reduction of Iran's inflation rate from around forty percent in 1392 to below ten percent in 1395 became one of the most significant advantages for Hassan Rouhani in his electoral campaign for a second term. However, despite this news, a significant portion of expert circles warned, based on a series of concerning signs, that the return of inflation to below ten percent might not be long-lasting. In early Ordibehesht, when the Central Bank announced that the inflation rate had increased from 9 percent to 9.5 percent in the first month of the year, it became clear that concerns about the fragility of this single-digit process were not unfounded. Currently, it can be confidently stated that the single-digit inflation rate in Iran, after a very long period, is not sustainable, and this index is very likely to return above ten percent in Khordad or Tir of the coming year. The validity of this concern was once again confirmed by the announcement from the Central Bank of the Islamic Republic on the fourth of Khordad this year, which stated that the inflation rate in Ordibehesht was based on the annual trend (the twelve months ending in Ordibehesht 1396 compared to the twelve months ending in Ordibehesht 1395) had increased to 9.8 percent. Before addressing the high likelihood of Iran rejoining the group of countries with double-digit inflation, it is essential to emphasize two points: 1) Iran's inflation rate, even in the range of eight to nine percent, remains very high compared to most countries in the world. According to World Bank statistics, the average inflation rate in the world in 2016 was 1.6 percent. In that year, this index was recorded at 1.3 percent in the United States, 0.2 percent in the Eurozone, and 1.3 percent in East Asia. Even in the Middle East and North Africa, which serve as a basis for comparing Iran's economic indicators, the inflation rate was 2.9 percent. This comparison shows that the Central Bank's use of the phrase "among countries with single-digit inflation" is not entirely accurate, as there is a significant gap between nine percent and two percent inflation in the current world, even though both naturally fall under the category of single-digit inflation. In other words, Iran still has a long way to go in the fight against inflation. 2) Nevertheless, there is no doubt that the achievements of Hassan Rouhani's government in combating inflation cannot be overlooked. Various factors, from greater discipline in managing expenses and revenues to reduced crippling pressures from sanctions following the conclusion of the JCPOA and the government's increased ability to control the currency market and diminished inflationary expectations, played a major role in the transition of the consumer price index from around forty percent to below ten percent. If these factors had not worked together, the likelihood of Iran's inflation rate reaching several hundred percent would have been very real. Despite the Rouhani government's significant success in drastically reducing the inflation rate, its deep-rooted causes remain untouched. In fact, inflation stems from within the country's economic structures, and controlling it sustainably requires fundamental changes to these structures. Severe fluctuations in oil revenues, currency shocks, low productivity, high production costs, rising indices of imported goods, soaring government expenses, and budget deficits, along with expansionary fiscal policies and disproportionate increases in liquidity, all contribute to inflation. Notably, in several groups of goods that are most consumed by the public, inflation rates remain high, including food and beverages, which increased by about eighteen percent in Ordibehesht compared to the same month last year, and healthcare, which rose by more than sixteen percent. However, the overall feeling among the public that the pace of inflation growth has slowed surely benefited Hassan Rouhani in the recent presidential election. The structural roots of inflation remain untouched despite the Rouhani government's significant success in reducing the inflation rate. In fact, inflation originates from within the country's economic structures, and sustainably controlling it requires fundamental changes to these structures. Severe fluctuations in oil revenues, currency shocks, low productivity, high production costs, rising indices of imported goods, soaring government expenses, and budget deficits, along with expansionary fiscal policies and disproportionate increases in liquidity, all contribute to inflation. Among these, the disproportionate increase in liquidity plays a crucial role in fueling inflationary tensions. Liquidity, in very simple terms, encompasses cash in the hands of the public and also bank deposits that can quickly and easily be converted into cash. The increase in liquidity should match the growth of goods and services available in a country. If the growth rate of liquidity is faster than the growth rate of goods and services available in a country, inflation rates will naturally rise. A high-spending government that is constantly facing a budget deficit prints money to meet its needs (in technocratic terms, it resorts to "borrowing from the Central Bank") and raises the liquidity volume without proportion to the volume of goods and services in circulation. In the late second term of Mahmoud Ahmadinejad's presidency, about twelve billion tomans were added to the country's liquidity every hour. This was one of the most important factors behind the heavy inflation that plagued the country for years. The banking-centric nature of Iran's economy, or the heavy burden placed on the banking system (Central Bank and banks) to finance, is one of the most important factors contributing to the disproportionate increase in liquidity and the surge in inflation. In a country with a healthy economy, both the government and the private sector meet most of their financial needs through the capital market and foreign resources. In Iran, a very large portion of the responsibility for meeting the financial needs of the government, quasi-governmental companies, and the private sector has been placed on the banking system and ultimately the Central Bank. The Central Bank, due to its lack of independence, cannot resist these "assigned duties." It can be confidently stated that if the government cannot maintain the transformation of the exchange rate based on the very slow current pace, the increase in inflation will be more than what the International Monetary Fund predicts. Controlling the exchange rate at the current level also depends on various factors, including the global oil market and pressure from economic circles. According to statistics from the Central Bank of the Islamic Republic, "in Bahman 1395, the amount of banks' debt to the Central Bank increased by thirty-five percent compared to the same period in 1394. Also, according to these statistics, the government's debt to the Central Bank also saw a growth of twenty-eight percent during this period" (Donya-e-Eqtesad, April 21, 1396). Such pressure on the banking system naturally contributes to the disproportionate expansion of the monetary base. In other words, Iran's economy remains trapped in very high liquidity growth, while the real growth of Gross Domestic Product (excluding oil) during the mentioned period has been at a low level. In this situation, reforming the country's banking system, ensuring the independence of the Central Bank, and creating the necessary conditions for expanding the capital market, including the debt market, should be among the top priorities of the twelfth government. In line with a large portion of expert circles in the Islamic Republic, the International Monetary Fund also confirms the return of Iran's inflation rate to double digits in the near future, predicting this index to be 11.2 percent in the current solar year and 11 percent in the next year. It can be confidently stated that if the government cannot maintain the transformation of the exchange rate based on the very slow current pace, the increase in inflation will be more than what the International Monetary Fund predicts. Controlling the exchange rate at the current level also depends on various factors, including the global oil market and pressure from economic and expert circles that argue that preventing the natural growth of the exchange rate contradicts fundamental economic principles and will lead to another surge in the dollar price in the country's currency market in the not-too-distant future.