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October 2019, No. 92


Inflation

Chronic Inflation:  An Endless War!


The starting point for the quadruple wars of the Iranian economy is inflation. Inflation is a disturbing issue that affects large sections of the population.


Economist Masoud Nili explaining the root causes of four false wars of the Iranian economy emphasizes on the role of “chronic inflation,” and says: “The chronic inflation of Iran’s economy is rooted in the institutionalized imbalance in the country’s financial system. For decades, the government has faced a budget deficit because it wants to do things that are not consistent with the balance of resources and the balance of incomes and expenses.” In the opinion of this economist “these wars will not end because the factors that create these conditions are very stable unless a historical nick of time occurs...”

The starting point for the quadruple wars of the Iranian economy is inflation. Inflation is a disturbing issue that affects large sections of the population. No issue - even beyond economic issues, in the most important areas of politics or culture, no matter how sensitive they may be - is more important than inflation which has broad consensus in opposing it. For example, today in Iran, compared to about 24 million employed, there are 3.3 million unemployed. When it comes to a policy that seeks to reduce the number of unemployed, there is a relatively small number of beneficiaries, but when inflation occurs - at the significant levels that we have been involved in over decades - tens of millions of people are severely subjected to its negative effects.

In addition, the disturbing impacts of inflation are felt on small units of time; that is whenever people go shopping they notice price increases and they are harassed. The widespread and uncontested dissatisfaction created by high inflation can be considered a serious threat to the political system. Therefore, no matter who causes inflation, people expect the establishment to “do something”. But the observation that people have in this regard is different from the scientific observation of the economists.

Economists recognize the growth of liquidity and the printing of money by the Central Bank of Iran (CBI) as the root cause of inflation, but the general public does not go so far into the depth of the problem. They only see that a vendor or producer has increased the price of goods over yesterday. If the government enters the game solely for the sake of satisfying the people - not being after solving the problem - it will fall into the trap of the four-legged wars I talked about; and if the first war begins, it must go up to the fourth war.

This is a domino that begins with the war between the firm and the household. In the first war, since the number of households is much larger than the number of firms, the government takes the household’s side to grab its satisfaction. In the second war, since the number of firms is larger than the number of banks, it supports the firms and in the last war, on the one hand, there are numerous commercial banks, and on the other hand, it is only the CBI. So there is no doubt that the issue starts with inflation.

However, both empirical observations, and the teachings of economics tell us that the chronic inflation of Iran’s economy is rooted in the institutionalized imbalance of the country’s financial system. The Iranian government has been facing budget deficit for decades (from the 70s onwards). The budget deficit in Iran is structural and institutionalized, and the reason is that the government wants to do things that are not consistent with the balance of resources and the balance of incomes and expenses. Of course, part of the financial imbalance is reflected in the structure of the state budget, and the other part in the banking system; and when these two imbalances are put beside one another the domino of false economic wars will be activated.

 

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  October 2019
No. 92