Economist Seeks to Answer: (KICKER) Is Hyperinflation Imminent?

EghtesadOnline: When the monthly inflation of Esfand [Feb. 20-March 20] and Farvardin [March 21-Apri 20] was published by the Central Bank of Iran, it was found that this inflation rate, which is 5-6%, alone is equivalent to the annual inflation of about 30 to 40 countri.

News ID: ۷۵۲۵۷۷

02 June 2023

Is the advent of hyperinflation in Iran's economy close? This is a question frequently asked by economists, experts and even officials these days. Some give a positive answer to these ambiguities, while some other officials and analysts believe there is no sign of hyperinflation in Iran's economy at the moment, Hadi Haqshenas, an economist, prefaced an article for the Persian newspaper Ta’adol with this note. The translation of the full text follows:

I believe that first we should see what the causes of inflation are and then analyze whether Iran's economic conditions make the emergence of hyperinflation probable or not. While it is wrong to completely reject the possibility of the outbreak of hyperinflation, it also cannot be guaranteed or confirmed. Therefore, we need to analyze the economic conditions and the reasons for the emergence of three-digit inflation.

Uncertainty Prevails

The most important negative feature of Iran's economy in the current situation is uncertainty. To prove this proposition, it is sufficient to take a look at the state of the capital market in recent weeks.

In spite of the fact that the two features of the capital market, namely market size and the P/E ratio [price to earnings] are not comparable to 2020 yet some simple news or routine comments turned the stock market into Black Monday [because of the fall on May 7 and 8]. I mentioned this to illustrate that the situation is such that the comments of two or three officials led to an unprecedented decline in the capital market. The process returned to normalcy after a few days. The question is why did this happen in the stock market?

The answer lies in the uncertain conditions of Iran's economy, where every market faces volatility. The same trend can be expected about the car or housing markets, as well as in monetary indicators.

Shocking Numbers

When the monthly inflation of Esfand [Feb. 20-March 20] and Farvardin [March 21-Apri 20] was published by the Central Bank of Iran, it was found that this inflation rate, which is 5-6%, alone is equivalent to the annual inflation of about 30 to 40 countries.

In a situation where some countries do not experience 4-5% inflation in a year, Iran's inflation rate amounts to this figure in a month. At the same time, point-to-point inflation in Iran's economy has reached about 70%. Interestingly, since the second half of last year, there has been no new shock to Iran's economy, the most important shock of 1401 [March 2022-23 Iranian year] occurred in May, when subsidized imports were eliminated. Why then, despite the dampening of this shock, inflation is still persistent?

The answer should be sought in the monetary, financial and foreign exchange policies and most importantly in the foreign trade sector. The growth of liquidity and 40% growth of the budget, along with economic uncertainty and lack of prospects, are the root causes of problems related to inflation.

JCPOA or No JCPOA

No one in Iran can say when the sanctions will end! This is while the government proudly announces that it runs the country without JCPOA [nuclear deal] and despite the sanctions. The important issue in this regard is not JCPOA or no JCPOA; the important thing is that the country's foreign trade and subsequently the monetary exchange need to return to normalcy.

When the government insists on not joining FATF, and on the other hand, the country's resources do not meet the expenses and there are disagreements in different sectors, they all form the capacity to create high inflation. Of course, this high inflation capacity is becoming visible in the form of 6% monthly inflation and 70% point-to-point inflation.

If this trend continues, the capacity to create hyperinflation, which is a three-digit inflation, is not far from expected.

It is expected that policies in the field of diplomacy and JCPOA will yield positive results. There are signs of improvement in relations with Saudi Arabia, Egypt and other regional states.

With these explanations, both the main issue of Iran's economic problem and the solutions are clear. Some of these solutions are political, some are executive and economic.

The political solution is to normalize foreign relations. In the domestic sphere, it is also necessary to reform monetary, financial and budgetary policies and, most importantly, to select efficient managers.

The qualification of managers of economic enterprises is the most important parameter for improving productivity. Therefore, hyperinflation can be prevented if a series of reform policies are implemented. Otherwise, everything is possible!