Monetary Targets Demand Viability

EghtesadOnline: A senior banker said economic and monetary authorities need to take into account the viability and practicality of their policies when setting economic targets.

News ID: ۷۸۶۶۶۷

13 July 2021

“Setting and publicizing targets is not enough. What is and should be the key is the effort that goes into achieving it,” Kourosh Parvizian, head of the Association of Private Banks and Credit Institutions was quoted as saying by IBENA.

Parvizian referred to the ambitious goal of the Central Bank of Iran when it set an inflation target in May 2020 at around 22% ± 2 for the period ending May 2021.

When the CBI announced the target with a high dose of misplaced self-confidence and said it was calculated on “realistic assumptions and scenarios”, it was soon rejected by economists and monetary experts as unrealistic and ambitious.

Data released by the Statistical Center of Iran indicates that the CBI fell far short of the target.  The center recently said overall average goods and services Consumer Price Index in the 12-month period ending June 21 increased by a crushing 43% compared to the corresponding period the year ago. Average annual inflation rate for the preceding calendar month ending on May 21 was 41%.

“When a central bank sets a target, it should mobilize all its efforts to realize it. If not its image will be ruined in the public domain,” Parvizian warned.

On why the CBI failed to meet the target, the banker pointed to poor economic governance and undeserving government intervention in the economy, which normally called on the CBI to pay for the deficit spending.

A similar evaluation was made earlier by Abdolnasser Hemmati, the former CBI governor, who had first announced the unachievable inflation target.

Apart from the government’s role in the failure to achieve the target, Hemmati blamed “unforeseen volatility in forex rates and deep trade imbalances”, which led to unseen hikes in consumer prices last winter due to shortage of basic goods and imports.

The systemic increase in prices has since become a permanent feature of the economy saddled with lack of transparency, mismanagement and the US economic blockade since 2018.

Efforts in Vain

Concerted efforts to tame the inflation were impractical since the onset as the government struggled with the deepening foreign currency crisis due to the outbreak of Coivid-19 and the US sanctions.

This pushed up forex rates to historic highs. “We set the target based on the presumption that the dollar would adjust around 170,000 rials. That did not happen and the greenback shot up to 320,000 rials in October,” Hemmati has been quoted as saying.