Iran CB Governor's Views About Chronic Inflation

In May 2020 Hemmati had said that the regulator was implementing a policy to “target inflation” and had set it at 22% ± 2 for the year ending March 2021.

Data released by the Statistical Center of Iran indicates that the CBI fell short of the target. The SCI reported that the Consumer Price Index in the year ending April 20 increased by 38.9% compared to the corresponding period the year before.

In a talk on prime time state TV, Hemmati said the failure was not because of the CBI’s monetary policy but due to a combination of factors, including “the tight budget, unforeseen volatility in forex rates and import-export imbalances”, which led to the unexpected rise in consumer prices in winter as imports plunged to new lows.

Pointing to the permanent chronic inflation, Hemmati said the average annual inflation rate was around 20% in the long-term and the CBI had set the target near the long-term average.  

Efforts to harness inflation near the set target were frustrated soon after it was announced by the CBI as the government was already struggling with unprecedented currency shortages due to the Covid-19 crisis and crippling US sanctions.

The two main factors pushed up forex rates to new highs. “We had set the [inflation] target based on the presumption that the dollar's price would remain at around 170,000 rials. That didn’t happen and the greenback shot up to 320,000 rials in October,” Hemmati told IRIB, the state-owned broadcaster.

Besides the forex rate hikes, normally the main driver of inflation, he pointed to disruptions in the import of basic goods in the closing months of the last fiscal year (ended  March 20), saying that that further pushed inflation much higher and away from the CBI-set target.

He recalled that the government’s oil and gas revenue sharply declined in the past two years due to the economic blockade imposed by Donald Trump.

“Our oil and gas revenue declined almost 80% last year compared to previous years’ average,” he said, adding that this caused monetary problems for the CBI and increased the monetary base as the government approached the central bank to plug its budgetary holes.

Hemmati said the CBI plans to revise its inflation target for the current year and will announce it within two weeks. 

Pressure to Lend

He criticized the Majlis for pushing banks to increase lending without considering the fact that “lenders need to balance lending with their financial resources.”

The parliament arbitrarily increased “obligatory lending” in the current fiscal year. Obligatory lending are loans that banks are required to lend as per law.

“Last year banks were required to give 1,200 trillion rials ($5.5 billion) in obligatory lending. That has been increased fivefold this year to reach 6,080 trillion rials ($27 billion),” the senior banker rued.

He referred to marriage and home loans as well loans to boost industries that have added pressure on the ailing banking sector, which could further weaken their balance sheets and give rise to inflation.

When debating the March 2021-22 budget, the Majlis approved home loans to the tune of 3,600 trillion rials ($16.3 billion) to first-time homebuyers. Lenders must pay 800 trillion rials ($3.6 billion) in marriage loans this year, almost double the year before. In addition, loans worth 1,000 trillion rials ($4.5 billion) are planned for SME’s, up from 850 trillion rials in the previous year.

Banks have been ordered to offer interest-free loans worth 250 trillion rials ($1.1 billion) for creating jobs and self-employment. The lengthy list makes economic experts wonder how the fragile money and lending institutions can cope under the mounting Majlis-mandated spending pressures.

The CBI earlier warned that the budget includes decrees to the central bank and the banking industry at large that could result in high-powered money and money supply growth.

Banks have come under renewed pressure as they have to meet budget targets while complying with the CBI’s stringent bookkeeping and transparency rules.