Anti-Inflationary Moves Commended

EghtesadOnline: The Plan and Budget Organization says role of the stock market and the Central Bank of Iran monetary policy is pivotal to curbing inflation.

News ID: ۷۵۰۰۷۸

19 May 2020

Referring to macroeconomic indicators during the Dec.22-March 19 quarter, the PBO underscored the role of the bourse in attracting liquidity and the CBI’s open market operation as two critical factors in bringing down runaway inflation.

“Rush of liquidity into the currency, gold and auto markets can result in harmful inflationary consequences,” the report published on the PBO public relations office said.

“It is very important to avoid hasty measures that could undermine the stability of macroeconomic variables,” the report said.

It added that growth in consumer prices lost pace as the last fiscal year (March 2019-20) drew to a close, but the trend may stop in light of the CBI’s expansionary policy to fight the coronavirus in first fiscal quarter (March-June).

Disregarding the CBI’s expansionary measures (which can give rise to inflation), the PBO estimated that the CPI could further decline to 27.2% in the current quarter, down from 36.5% last quarter

CBI data show that inflation was 41.2% in the last fiscal year that ended in March. The figure is expected to drop during the current fiscal year.

The International Monetary Fund has forecast improvement in Iran’s economic indicators in 2020, estimating that consumer prices in Iran would drop to 34.2% in 2020 and 33.5% in 2021.

Pointing to the expansionary policy, the PBO was referring to the CBI’s financial assistance to help low-income households and struggling businesses impacted by the rapidly spreading coronavirus.

The government approved 750 trillion rials ($4.6 billion) in April. Almost 500 trillion rials in loans was to be given to SMEs hit hard by the pandemic and the balance in interest-free micro credits to more than 23 million needy families.

Stock Market Route

PBO gave a positive rating to the government decision to fund its budget in ways that are not prone to pushing up inflation.

“The combination of government measures with regard to funding the budget deficit, such as promoting the stock market and selling government stakes in state-owned companies is indeed a positive step.”

As part of a divestiture scheme, the government has started selling its shares in 18 companies via three ETFs.   It has urged the public to buy ETF units that hold government stakes in three banks and two insurance companies.

Government shares are to be divested through three ETFs, the two other deal with shares in refineries, auto and metal companies.

However, the PBO noted that the budget deficit is expected to worsen due to the government’s failure to fulfill tax revenue targets as a result of the destructive impact of the deadly virus on businesses, which obviously cannot pay tax on dwindling and vanishing profits.   Covid-19 has hit most businesses in Iran like a tsunami hurling them into a sea of red ink and destroying livelihoods and jobs.

The report concurred that conventional monetary policies are no more useful in dealing with runaway inflation due to the ballooning liquidity that is very likely to grow bigger due to the CBI’s expansionary measures.

In the report the CBI is advised to adopt a monetary policy that enables policymakers to define inflation targets. It also recommended the CBI to expand its open market operation.

“It is essential that the CBI set inflation targets and implement the OMO on a larger scale.”

OMO is a financial instrument through which central banks buy and sell securities to expand or reduce money supply. The mechanism allows central banks to buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  Selling government bonds reduces the base money and raises interbank rates

CBI Governor Abdolnasser Hemmati announced Friday that the bank is ready to implement “inflation targeting” measures.

“Within this policy, the targeting approach will act as a compass guiding the CBI’s monetary and currency policies,” Hemmati wrote in a note in his social media account.

In another note on Monday, he said “the CBI will announce its target inflation in the near future.”

Inflation targeting is a central bank strategy that specifies an inflation rate as a goal and adjusts monetary policy to achieve that rate. Inflation targeting primarily focuses on maintaining price stability, but is also believed by its proponents to support economic growth and stability.

The assumption is that the best a monetary policy can do to support long-term growth is maintain price stability, which is achieved by controlling inflation.

Hemmati pointed to the galloping inflation as the bane of Iran’s economy in the past decades, adding that the new policy will be implemented in tandem with other monetary and currency measures to stabilize macrocosmic indicators.