May Iranian economy resuscitate from doldrums

TEHRAN, Jul. 31 (MNA) – Inflation rate (the increase in consumer prices besides those of the producer), as one the main economic indices, has skyrocketed during the past recent year, i.e. as of the US withdrawal from the JCPOA, May 8, 2018. 

Prices started their incremental growth after almost two years of economic stability under JCPOA implementation.

As the economic index which is more tangible to common people, inflation rate plays a vital role among other economic indices due to its influence on people’s livelihood.

Along with the common people stand the Iranian business activists, producers and investors. Those whose businesses were tied with fluctuating forex rates and their impact on imports of raw materials and could not have a clear vision of the market's future to make safe investments.

No one can deny the positive correlation between forex rates and the inflation index in Iran, the two go hand-in-hand in this country.

During the past one or two months, forex rates have cooled down. Dollar exchange rate stepped down to 118,000 rials in July from its previous level hovering around 144,000 rials in late March and the market seems to be experiencing a stable condition but is not highly predictable yet. 

The Governor of the Central Bank of Iran Abdolnaser Hemmati has repeatedly announced that the CBI has a good control over forex market and bubble of forex rates is getting smaller. "The illusion about any instability or inflation in domestic foreign exchange market, which was constantly spoken of, is broken for the nth time by the CBI management," Hemmati said on April 24.

Regarding the mentioned direct correlation between forex rates, Iranians expect inflation to warm down, too. ‘Now, it is time for the inflation rate to start its downward trend,’ people expect.

But nothing is yet felt at supermarkets, chain stores, bazzars, etc. Some not remarkable and periodic reduction in prices of cars and housing units have occurred recently but the markets are facing a kind of recession. 

Additionally, based on the latest report of the Statistical Center of Iran (SCI), consumer inflation registered a year-on-year increase of 48 percent in the Iranian month ending July 22 compared with the similar month last year. The overall Consumer Price Index (using the Iranian year to March 2017 as the base year) stood at 179.7 in the fourth month of the Iranian year, indicating a 2.8 percent rise compared with the previous month. The goods and services CPI in the 12-month period ending July 22 increased by 40.4 percent compared with last year’s corresponding period. SCI had put the inflation rate for the preceding Iranian month, which ended on June 21 at 37.6 percent. 

What is going on then?

As a matter of fact, inflationary impacts of forex rates growth show their face very soon but the reverse process is a lazy to get started i.e. prices are more inclined to move on an uprising trend.

Mehr news agency conducted an interview with Dr. Bahamn Arman, Iranian economist and a university professor to get a better view over the issue.

Minimizing the role of all the governments in determining forex rates, Arman said that in Iran, for years the economists have required administrations to modify inflation rate based on real forex rates but due to political issues the idea has been rejected. “However, in some specific periods, inflation rate sprang forward and skyrocketed to modify itself in accordance with real forex rates,” he said. Inflation’s jump in the past year can be explained, accordingly, and due to the political conditions of the country in the said time, he added.

Dr. Bahman Arman

The Iranian economist also referred to the role of the international investment banks in designating forex rates and prices of oil and commodities besides capital markets all across the globe, which operate under political demands of their governments. In better words, working under their governments’ political demand, the global investment banks control flow of money across the world. “In my opinion, what is going on in Iran, in particular the story about the forex rates, is comprehensively an international political trend which goes along with domestic economic structure of the country,” he elaborated. “The put embargo on exports of Iranian oil and other types of the imposed sanctions on the country’s economy, those which restrict Iran’s relations with international banks or financial markets are all parts of the same puzzle,” he added.

“A mixture of both political and economic factors is affecting Iran,” Arman said.
In Arman’s idea, the inflated forex rates should not be considered as a means to blame administration since, with previous modified forex rates, imports of various kinds of products were economical while producing them domestically was a costly procedure and non-economical. “The unreal and modified forex rates had made Iran a safe haven for importers and smugglers of the basic goods such as sugar, vegetable oil, and wheat putting a heavy burden on the shoulders of domestic producers” the Iranian economist said.  

Any predictions about the future of inflation rate in Iran should be regarding the volume of the attracted investments and the status quo of national currency i.e. its depreciation or reinforcement, Arman underlined.  

Furthermore, the Iranian economist underscored the current economic conditions of the US, where the inflation rate is under control, the unemployment is at the lowest rate in the past 50 years and economic growth is at an optimum level. “Dollar should be reinforced under Trump’s tenure, his policy of ‘America First’ and levied tariffs of imported goods, however, the rate is curbed hovering around €1.11 to €1.14. Dollar is intentionally prevented from getting reinforced, since any increase in its value will lubricate imports of goods to the US and put jobs in the US at risk,” he said.

“The same story can be true for Iran in some ways,” he noted, “Rial depreciation can prosper domestic production and growth.” “Iranian farmers prefer to export their products when rial is weak to neighboring countries,” he added. 

The economist, meanwhile, urges the government to incrementally let the forex rates freely modify themselves and omit what is called in Iran ‘official forex rate’, which is around 42,000 rials for each dollar (while at the free market the rate stands at around 120,000 rials). “The set governmental forex rate has ignited and facilitated corruption in domestic economy,” Arman underlined.

“The official forex rate must be allocated merely for imports of industrial machineries and any other types of required goods must be imported at free market forex rate,” he suggested.

“Rial depreciation has had repercussions on Iranian purchasing power but it has paved the way for domestic production of a wide range of products which had been imported previously,” Arman said.

He also underscored that “it is vital for the government to make the nations aware of the fact that regarding the conditions of the country, populistic approaches are not efficient nor practical.”

“How can it be possible that in a country [Iran], the price of a bottle of mineral water is 2.5 time more than that of a liter of petrol?” he asked highlighting that the situation is neither normal nor realistic. 

“To make the economy prosper under the present circumstance, the government should concentrate on those parts of the economy which have no link to the imposed sanction such as the housing sector,” he suggested.

“The government can start issuing bonds or establishing new public companies to supply the required liquidity for funding semi-finished development projects in Iran, while Iranian banks cannot fund such projects” Arman said.

“Domestic capital market, which is state-run, can also assist the government with the issue,” he said, “however, the capital market is not as powerful as it can be.”

“The total value of Iran’s capital market is at $80 billion, while that of Saudi Arabia stands at above $600 billion, i.e. Iranian capital market can grow much bigger than it is now,” the economists added.   

“The government should engage domestic private sector in implementation of development projects via attracting their financial resource to the capital market,” Arman concluded.

In accordance with what Arman said, high liquidity volume is recognized as one of the main factors propelling the forex rates and consequently the inflation rate in Iran. It makes the central bank to print notes and makes the government and other banks borrow from the central bank. 

The CBI governor has said that as in the previous year, the main goals of the central bank are controlling liquidity volume and protecting domestic production in the hope for controlling the inflation rate. He has referred to supplying the required liquidity for production units, which incurred losses due to forex rates fluctuations, besides supplying required resources for importing basic goods as other major targets of the CBI.

It should be noted that one of the other challenges of the Iranian administration in the current year is revising its budget deficit, while the US sanctions are set to close the artery of oil revenues. Any decision about the method of supplying budget resources would have a direct influence on inflation rate. In case the government decides to borrow from the central bank, the consequences would be tough on inflation rate in both producer and consumer prices. 

Without a doubt, sanctions can be an opportunity for Iran to reduce its reliance on oil revenues and move towards an exports-oriented and indigenous economy. It is vital for the country to get independent from the international bodies restricting flow of money into it and construct new and more tightened ties with regional countries based on mutual cooperation and agreements, which are not vulnerable to US-led sanction. This is for sure a bumpy one but under the aegis of proper planning and management, the country’s economy has the chance to revive.

HJ/

News Code 148260

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