Chronic Inflation Damages Economic Growth Prospects

EghtesadOnline: Chronic inflation, which stems from economic imbalances, ruins economic growth, Masoud Nili, a prominent economist and professor of economics at Sharif University of Technology, says.

News ID: ۷۴۸۴۳۶

15 September 2019

“Iran’s economy has not fared well in terms of long-run growth, which is a sustained rise in the quantity of goods and services it produces. Chronic inflation is one of the root causes of the Iranian economy’s poor performance,” Nili said in an interview with Donya-e-Eqtesad media group’s video-streaming service EcoIran.

Iran's gross domestic product shrank by 4.9% in the fiscal 2018-19 compared to the year before, the Statistical Center of Iran's latest report shows.

Economic growth, excluding oil production, stood at -2.4%. Production in "industry" and "agriculture" contracted by 9.6% and 1.5% respectively. The "services" group posted a meager 0.02% growth, according to Financial Tribune.

Iran’s economy in the fiscal 2014-15 registered a 3% growth after two years of recession when the economy contracted 5.8% and 1.9% back to back, according to the Central Bank of Iran.

CBI has put 2016-17 growth at 12.5% while SCI says it was much lower and near 8.3%.

The former ceased to release reports on Iran's growth rates.

The World Bank recently downgraded its forecasts for Iran's economic growth.

In its latest Global Economic Prospects report published in June, it forecasts Iran's GDP to contract 4.5% in 2019 after having experienced an estimated -1.9% growth in 2018.

The above figures indicate -0.9 and -0.4 percentage point differences compared to the World Bank's January report respectively.

Forecasts for 2020 and 2021 are at 0.9% and 1%, indicating -0.2 and 0.1 percentage point differences compared to the world January report respectively.

According to the World Bank report, Iran’s year-on-year inflation has risen sharply from about 10% in mid-2018 to about 52% in April 2019, contributed by a depreciation of the rial in the parallel market of more than twofold compared to levels prior to the announcement of US sanctions in April 2018.

"Growth in Iran is expected to resume in 2020-21, albeit at weak rates, as the impact of US sanctions tapers and inflation stabilizes," the report said, noting that further amplification of US-Iran tensions would pose risks for the region’s economies other than Iran.

The International Monetary Fund has forecast a deepening recession for Iran's economy this year, projecting real GDP growth of -6% in 2019 after a contraction of 3.9% the year before.

In its newly released "World Economic Outlook" report, IMF sees growth will come back at a meager rate of 0.2% in 2020 before increasing to 1.1% in 2024.

Driving Up Economic Costs

Inflation drives up economic costs in two ways: First, it increases the costs of transactions and reduces the competitive edge of businesses and then interrupts economic stability by giving the government a pretext to interfere in the markets, Nili said.

The economist stressed that such interference creates an unpredictable environment in the economy.

The average goods and services Consumer Price Index in the 12-month period ending Aug. 22 increased by 42.2% compared with last year’s corresponding period, the Statistical Center of Iran's latest report shows.

Consumer prices registered a year-on-year increase of 41.6% in the Iranian month ending Aug. 22 compared with the similar month of last year.

The overall CPI (using the Iranian year to March 2017 as the base year) stood at 180.8 in the fifth month of the Iranian year, indicating a 0.6% rise compared with the previous month.

Referring to the Phillips curve, an economic concept that states inflation and unemployment have a stable and inverse relationship and that with economic growth come inflation and more jobs, Nili said such a theory is disproven in the event of high, double-digit inflation rates.

Iran’s unemployment rate, the proportion of jobless population of ages 10 years and above, stood at 12% in the last Iranian year (March 2018-19), indicating a 0.1% rise compared with the year before (March 2017-18).

A total of 3,260,796 Iranians were unemployed last year, according to the Statistical Center of Iran. The unemployment rate for men stood at 10.4% while women joblessness hovered around 18.9%. Over 2.25 million men and 1.01 million women of ages 10 and above were jobless last year.

The economist believes Iran’s chronic inflation is to blame for the lack of a sustainable balance in the country’s budget and an annual increase of over 20% in money supply.

Data released by the Central Bank of Iran indicate that total money supply crossed 18,828 trillion rials ($164.43 billion) by the end of the last fiscal year (ended March 20, 2019). The figure registered a 23.1% growth compared with the data reported for the end of the year before.

Lavish Spending

Nili said Iranian governments and ministries tend to showcase their efficiency through their spending.

“They are lavish in spending the money that comes from state coffers, regardless of their revenues. Such a modus operandi leads to budget deficit. In most economies, the government budget is viewed as a financial-policy tool,” he said.

“The first thing that is weighed up at the time of budget preparation is the transparency of the government’s financial policy. But in Iran, policymakers are inclined to achieve stability by controlling microeconomic fluctuations rather than streamlining macroeconomic policies.”

The economist noted that at present, the government is caught up in a vicious circle that gives rise to inflation.

“Due to the decline in purchasing power, the government itself is one of the main losers of these policies. The rise in government expenditures creates a so-called monetary mirage for economic decision-makers. Inflated figures give them the illusion that they can expand their development plans. However, they cannot even afford their estimated expenditures, given the rise in the price index of goods and services,” he said.

Stressing that regulating the budget and creating a solid order to limit budget deficit requires an institutional maturity, Nili said, “A balanced budget would help control the rise in money supply and inflation, followed by a dynamic economy and sustainable growth.”

The Central Bank of Iran's latest budgetary report to date shows Iran’s budget deficit came in bigger than expected in the nine months of last fiscal year (March 21-Dec. 21, 2018) to hit 451.1 trillion rials ($3.93 billion).

The shortfall, which was bigger than the budget law’s forecast of 243.9 trillion rials ($2.13 billion) for the nine-month period, registered an increase of 17% year-on-year.

To cover the deficit, the government sold 8.7% more bonds—a total of 653.7 trillion rials ($5.7 billion) in the nine-month period YOY.

The government’s overall revenues during the nine months amounted to 575.8 trillion rials ($5 billion), indicating a rise of 69.2% YOY, while its spending hit 1026.9 trillion rials ($8.96 billion) to register a 41.5% growth YOY.