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June 2021, No. 97


Economy

40 Years of Growth & Inflation


The experience of different periods of the rule of presidents has shown that, despite numerous promises the result has not been improvement in the economic welfare of the people and the improvement of their livelihood.


In its final year, the government has pursued expansionary policies (as is customary in other countries). The governments public resources and expenditures in 1399 (2020/21) was equal to 5,710,000 billion rials, which figure has increased in the 1400 Budget Bill to 8,410,000 billion rials (about 50% rise). Moreover according to a resolution adopted by the Parliament the figure went as high as 12,800,000 billion rials (2.3 times bigger). The composition of government expenditures shows that 75% is current expenditures and the rest is almost evenly distributed between construction projects and debt repayments. Due to the nature of these expenditures, there is the least flexibility to adjust and any non-allocation of expenditures means postponing the claims of stakeholders and government debts. On the resources side, apart from the nature of the sources of financing the budget deficit, we are facing a serious shortage of revenues.

Given the US conditions for lifting the sanctions (negotiations with Iran on non-nuclear issues) and the complexities of this issue, there is no positive outlook for lifting the sanctions (especially oil sanctions) this year; Therefore, the realization of the sale of 2.23 million barrels of oil seems far from reality. Public revenues (taxes and the like) can be achieved within the governments forecast (in other words, the figures added by the Parliament will not be realized). The sale of bonds will almost certainly take place because the buyers are contractors who have no choice but to buy the bonds due to years long claims, but the sale of the property will not be possible as in previous years due to lack of necessary infrastructure; Therefore, due to the governments budget reliance on unsustainable resources, inaccurate forecasts and consequently lack of resources, the allocation of funds for various purposes is disrupted and in addition to continuing structural budget problems such as non-completion of development projects and accumulation of public sector debt, trade union protests (retirees, teachers, etc.) will also continue.

Withdrawal from Central Bank of Iran (CBI) resources will be a viable option if the government, in accordance with the routine of previous years, allocates credit for various purposes beyond the realized resources; As a result, inflation is expected to be even higher than last year. But more importantly, with this highly expansionary budget, it will be difficult to maintain financial discipline and control inflation in the years to come. In the long run (the last 4 decades), the countrys economic growth has averaged close to one percent and the average inflation rate has been around 19 percent. The countrys annual economic growth in the last 10 years has been close to zero on average and the average inflation rate has been around 20% (World Bank statistics). Assuming the inflation rate is at least equal to that of 1399 for this year, in the last four years, on average, about one third of the purchasing power of the people has been lost every year; Thus, the economic well-being of the people has drastically decreased.

If we add the high unemployment rate (more than twice the global rate), especially among the youth, to the above indicators the countrys economy will be in a very critical situation. With short-term decisions and the inability to take corrective action, along with the features of this year, namely the change of government and the new Parliament, there is little hope of resolving the problems this year; But perhaps the future government, with realism and taking the right decisions, will be able to solve at least one of the two chronic problems of low economic growth and high inflation. In the following, we will briefly show which problem is more realistic and easier to solve. It is not bad to first look at the different nature of the two variables of economic growth and inflation and the experience of countries in dealing with these two. Between these two variables, creating sustainable and continuous economic growth has been the concern of all countries in the world, while few have succeeded in doing so. Our country is also in the list. But inflation is different.

An examination of economic indicators shows that different countries of the world (with the exception of a few states) have been able to control the inflation rate, regardless of their degree of development or geographical location. Our country's performance in both economic growth and inflation is disappointing, as in the last 42 years, the average annual economic growth has been close to one percent and the inflation rate has been around 19 percent, as in the last 42 years, the average annual economic growth has been close to one percent and the inflation rate has been around 19 percent. These indicators have worsened in the last 10 years, while they have improved on average in different countries and regions and in the world; But the hope is that controlling inflation is not as dreamy and unattainable as economic development!

High inflation rates have significant adverse economic and social effects: (1) they cause uncertainty and reduce investment, (2) they lead to lower economic growth and instability, (3) they reduce the competitiveness of the economy at the international level, (4) reducing inflation can lead to recession, (5) saving is reduced, (6) real wages and purchasing power are reduced, (7) income inequality goes up, (8) salaried people such as employees, and pensioners come under increasing pressure, (9) government spending enters an increasing and uncontrollable cycle, (10) it puts pressure on civic institutions and can lead to increased protests and social unrest, (11) falling living standards lead to brain drain, (12) undermines the fight against poverty, (13) it weakens the value of the national currency and foreign currency replaces the national currency and ...

The experience of different periods of the rule of presidents has shown that, despite numerous promises the result has not been improvement in the economic welfare of the people and the improvement of their livelihood. The frequency of problems, the multiplicity of decision-making centers, insufficient powers, etc., have plagued the president and his government members on a daily basis, and the result of one or two four-year terms has not been a significant economic achievement. Instead of making a variety of promises, the next head of government can focus his efforts on one important and yet achievable goal: curbing double-digit inflation. If this goal is achieved, the effects of this success will be evident in 3 or 4 years.

In fact, a goal that has been tested in the real world and is least affected by external factors (such as sanctions) will achieve other important economic and social objectives: the purchasing power of the people will increase, the national currency will strengthen, foreign currency fluctuations will be controlled, social and livelihood protests of the people will be reduced, the fight against poverty will be possible and, most importantly, economic growth and employment will be enabled by increasing savings and investor confidence. Of course, achieving this goal involves taking some challenging corrective actions. Reforming the budget structure (moving towards a balanced and deficit-free budget, changing priorities and allocating resources to the real needs of the people, creating equality between provinces, etc.) and granting sufficient independence to the CBI are among the most important of these measures.

 

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  June 2021
No. 97