Will the Rising Trend of Inflation Return to Iran's Economy?

Hosseini Mirshojaian, the Deputy Minister of Economic Affairs, states: "Our statistics indicate that inflation may return to a double-digit path starting from June. This government official added: 'Keep in mind that our prediction was that the average inflation rate would reach 9.6% by the end of the year 1395 (2016), but it ultimately reached 8.9%. This was due to a combination of internal and international factors that caused the inflation situation to deviate from our forecast. Currently, predictions suggest that inflation will rise and return to a double-digit trajectory, but I emphasize that the government can counter the increase in inflation with certain actions.' He believes that: 'It should be noted that the government's policies in the year 1396 (2017) can be influential in controlling inflation and combating its rise. This also depends on what policies the government adopts, how much it can control the monetary base, and what measures it takes regarding the velocity of money.' It should be noted that the average inflation rate in Iran is currently several times higher than the global average inflation rate. Therefore, although the average inflation rate has decreased compared to the past four years—specifically during Ahmadinejad's presidency—this decrease is not a result of structural economic reforms but rather a combination of economic recession and contractionary and disciplinary economic policies. Nevertheless, the inflation rate of essential goods such as food remains very high. One of the signs of potential inflation in Iran is the inflation rate of essential goods such as food items. Therefore, if other sectors of the economy, such as essential goods, become active, it is expected that the inflation rate in those sectors will also rise. However, with continued economic growth and an acceleration in the economic cycle, the inflation rate will increase because some economic problems, whether policy-related (budgetary and monetary) or structural, are still sources of inflation. What are the institutional and structural roots of inflation? The most important direct factor of this potential and dormant inflation—which is also institutional—that may awaken again is the accumulated and massive budget deficit of the government and consequently the ongoing increase in liquidity in the economy. This budget deficit is mainly due to the inefficiency of the government apparatus, its large size, the high ratio of current expenditures, and the lack of transparency of institutions that do not pay taxes while benefiting from budgetary rents. To solve these problems, measures must be taken; otherwise, the inflation rate will rise again. Currently, although liquidity is growing, the speed of money circulation has decreased due to deep recession. Statistics related to transactions of capital goods such as housing and cars also indicate a decrease in money circulation. Therefore, the inflationary effect of increased liquidity is neutralized by the reduced speed of money circulation due to deep recession and the contractionary policies of banks; otherwise, the inflation rate should be higher than what we are witnessing. What actions can manage and control inflation? If the government optimally employs monetary and financial factors, it can at least prevent the return of hyperinflation in the short term and control inflation at current levels. The main policies that can achieve this include preventing the growth of liquidity by reducing the budget deficit and limiting the government's current budget expenditures. Although increasing tax revenues is an effective solution in this context, tax revenue enhancement policies have not been very successful so far because increasing tax revenues in Iran faces various constraints and cannot solve the budget deficit problem all at once. Part of this constraint relates to tax evasion by quasi-governmental institutions, while another part is due to legal and managerial-organizational deficiencies in the tax system. At the same time, it should be remembered that in a recession, it cannot be expected that taxes will grow significantly because with reduced economic activity, the tax capacity also decreases. Therefore, in a recession, it is recommended that the government reduce rent-seeking expenditures and political privileges in the budget to reduce the budget deficit and achieve budgetary balance. Therefore, the government must first reduce its current expenditures and secondly increase its budgetary revenues to limit and control the budget deficit. There is consensus that many rent-seeking institutions feed off the government budget without being transparent, accountable, or yielding positive returns. This depletion of resources is one of the reasons for the budget deficit, the government's massive debt, and ultimately the inefficiency of resources, which is a factor in potential inflation. Experience shows that the government, without such actions, even if it obtains substantial financial resources, will waste a significant portion of it and will not succeed in solving problems. The President of the 11th government, with the votes he received in the recent elections, has created a vast social capital that can serve as a key to solving political, economic, and social problems. The votes for the government can be seen as a confirmation of the policy of de-escalation and avoidance of populism and economic demagoguery. Therefore, the government—at least politically and potentially—has the opportunity to implement some budgetary and structural reform policies to reduce the costs of rent-seeking institutions, decrease their share in the economy, and simultaneously tax them. Such a policy can increase economic accountability and transparency while simultaneously enhancing the government's social capital, meaning public trust in the government. Accountability and transparency of opaque economic institutions have positive implications in both political and economic arenas. With the transparency and accountability of these institutions, their interference in political affairs will be prevented, providing a historic opportunity for political reforms. On the other hand, this political reform will also help achieve budgetary balance, which is an opportunity for controlling inflation. Both of these components will ultimately increase the trust and social capital of the government. Therefore, solving economic issues is somewhat dependent on resolving political issues.