on Inflation, Development Budget
Ali Tayebnia, Minister of Finance and Economic Affairs said: “We
should prevent the return of inflation
as we have reached “the hard core of inflation”
and fighting it has
ministers of the incumbent government have issued warning; one on the return
of inflation and the other one on the failure to meet the development credit
in this year’s budget.
One can think
of two possibilities: It could be the last straw that breaks the camel’s
back and that is why they have voiced deep concern; or it could have been
just a warning. Whatever it is, their statements are a matter of concern.
Minister of Finance and Economic Affairs said: “We should prevent the return
of inflation as we have reached “the hard core of inflation” and fighting it
has become difficult.”
the Minister of Roads and Urban Development, said: “We had 320 thousand
of credit this year, but the entire development budget was57thousand billion
tomans that is to say 20% of the entire budget but this was nominal; but in
its real terms by taking into account the bonds and all future obligations
and documents the figure would stand at 25 thousand billion tomans or 9%
tops. This trend would be weakened next year so much so that in nominal
terms it would stand at 40 thousand billion tomans and it is not clear what
percentage would go to the development budget.”
It seems that
concerns voiced by domestic economists over the unbridled growth of
liquidity and continued recession have come true. In the meantime, this year
is the last year of Hassan Rouhani’s administration which has designated
itself as “the Government of Prudence and Hope”. As is the tradition in the
Iranian governments, in the years leading to new elections, every word
uttered by high level government officials could be politically motivated;
many of them would hardly speak up; but the comments by the two ministers
could support the speculations of concern over the economy.
daily “Shargh” trying to find out the meaning of ‘hard core inflation’
contacted some senior economists such as Behrouz Hadi Zenouz, Pouya Jabal
Ameli and Hamid Reza Baradaran Shoraka; but none of them knew the meaning of
the phrase. Studies show that Robert Gordon, a professor of economics in
North Stern University in 1975 added the concept of core inflation to the
economic literature. In the definition for the first time it was tried to
separate the role of transient and ephemeral factors from the main and
fundamental factors generating inflation. Thus, the rate of inflation was
divided into two transitory (the shell) and permanent (the core) components.
This distinction is important as with the consideration of short and
long-term impacts and adoption of proper monetary and financial policies we
can help control the inflation.
Abbas Akhoundi, the Minister of Roads and Urban Development,
said: “We had 320 thousand billion tomans of credit this year,
but the entire development budget was57thousand billion tomans
that is to say 20% of the entire budget but this was nominal
senior economic adviser to President Rouhani used this phrase when he said
inflation has reached its hard core and economic growth its hard shell. “The
shock of oil price fall dealt a severe blow on the government income in 1394
minister has also referred to the war waged against Iran by Saudi Arabia on
bringing the oil price lower which resulted in great loss for our country;
the Saudi wanted to break Iran’s resistance; in the words of the minister
return of inflation should be prevented as we have reached the hard core
inflation and it is difficult to check it. Tayebnia said: “We were not after
cutting the inflation lower than 8%; as it might have serious consequences
for our economy.”
the minister, oil price cut resulted in higher inflation and lower output
rate so that at that time it was possible to use hard currency reserves
outside the country for managing the problem or make advance oil sales. At
present on paper, there is $100 billion in foreign exchange reserves outside
the country; while the Persian Gulf states publish bonds in international
markets and make money; but this was not possible for Iran, said the
also contacted Hamid Reza Baradaran Shoraka, the former head of the
Management and Planning Organization of Iran and professor of economics at
Allameh Tabatabaei University.
is an analysis of the concern voiced by the two ministers including
mechanisms to improve Iran’s economy in the brief interview with Baradaran
of economy has announced that we have reached the “hard core of inflation”
and we should prevent inflation from coming back again. The question is
which point in the economy it refers to when it mentions “hard core
inflation”? Basically, what does “hard core inflation” mean?
Believe it or
not, I do not know either; you should ask the minister.
But the fact that the economy minister has implicitly warned against rising
inflation, more than anything else what could it be related to?
In my opinion,
it could not refer to anything else other than one thousand trillion tomans
Well, the Iranian economy is currently wrestling with the dilemma of
“paradox of liquidity”. So far, despite the growth in liquidity, neither the
inflation has made an outstanding growth nor the issue of stagnation has
improved; true that the economic growth rate of the first half of the year
is set at plus 7%; however we all know that this growth is indebted to the
I think there
is concern that if the volume of liquidity that exists in the economy today
flows down and turns into demand and the government would have no proper
response for this demand, automatically important inflationary impacts will
be developed. So far, the government has been able to control the inflation
by locking the resources, the prevailing speculations, import of
commodities, etc. It is precisely like saying “demand” has been suppressed;
but if conditions are created in which demand is released and this volume of
liquidity turns into demand, the possibility of return of inflation is very
high. The concern of the economy minister is possibly from this point of
view. However, whatever it is we cannot read his mind and finally the best
person to provide an answer is the minister himself.
Hamid Reza Baradaran Shoraka, the former head of the Management
and Planning Organization of Iran said: I think there is concern
that if the volume of liquidity that exists in the economy today
flows down and turns
into demand and the government would have no proper response for
this demand, automatically important inflationary
impacts will be developed.
But you are an economist too and have held top economic managerial posts;
you have most probably an analysis of the situation; in your opinion how the
economic team of the government can take care of the inflation rate and
In any case,
there are tools at the disposal of monetary policy makers of the country to
manage the situation.
to the legal reserves of the banks; interest rates; the volume of money in
circulation; directing resources towards productive investments; encouraging
domestic production; creating proper business atmosphere and tools of this
kind. In fact, there are many tools through which the policy makers can
implement their policies.
So the government somehow should apply contractionary monetary policies?
It should adopt
both the contractionary policy and the targeting policy, or economic
targeting as they call it. In macro economy there is a section called target
inflation or inflation rate targeting; that is to say the economic policy
makers target the inflation rate and then the Central Bank and the monetary
policy makers undertake to use all the tools in order to realize the
projected target. If this is the case and the people trust the target it can
conditions are necessary for realization of this target; first, the monetary
policy maker should announce his targeting at a proper time before the
economic agents took their important decisions. Second, conditions should be
provided so that people would believe in the statements of the monetary
officials; that is to say when the officials announce that the “inflation
rate targeting” is 8%, under no circumstances would they let this percentage
go up. With these two preconditions, it can be hoped that targets of the
politicians will be realized.
Do you think there are hopes today?
The reality is
that it is hard but not impossible. There are countries that have left
behind this stage and they are not few in number. About 50 countries in the
world have been able to take advantage of targeting inflation rate in line
with the improvement of their economic targets.
Simultaneously with the warning of the economy minister about the inflation,
minister of roads and urban development warned against non-realization of
the development budget. The question is to what extent these two concurrent
warnings by two economy ministers can describe the economic situation as
disturbing? Meanwhile, this is the last year of the 11th
government and in fact we are in the election year. To what extent this can
affect Iran’s political economy?
This depends on
how the people, the economic agents and those who make economic decisions
for themselves pay attention to these points. This is an important issue;
since in advanced countries, every remark made by an official will truly
affect decision making of the people. For example in the developed countries
announcement of such a situation by two ministers would leave its immediate
impact on the stock market; however, in our country sensitivity to these
words is less in the decision making process.
is that we should not forget that at a time when remarks are made about the
budget, we should not ignore oversizing of the government; that is to say, a
large government which spent a huge volume of resources for its current
budget cannot be controlled. About the current budget as soon as a statement
is made all would say it is unavoidable! Can we not pay the salary of the
government employees, the retired, etc.?
Payment of the targeted subsidies should be added to the payment of
salaries; because some time ago the industry minister in an interview
announced that the government has not paid part of the ministry’s credits to
be able to pay the subsidies.
targeted subsidies, you should pay attention that one day a head of
government made a promise to the people and it became law. Aside from these,
today this is a subject of public debate; an issue which is vital for many
people. The government has not been able to find a mechanism to make the
payments targeted as it suggests. Well, when this money is paid to all, it
is no more targeted. Targeted means you target certain groups of people and
only pay them the subsidies. Well, this year at any rate is the year of
election. Which sage chief executive would talk about cutting subsidies on
the eve of elections?
But it is not just this one year! They had three years for real “targeting”
of the subsidies. In fact, this was also an election slogan of Mr. Rouhani.
The point is
that do we intend to solve the problems or not? The resolve to solve the
problems is one issue and the question of mechanisms is another. First, a
drive should be developed which can find proper mechanisms for the solution
of economic problems. That resolve does not seriously exist in Iran. What I
am trying to say is that the conditions of the country are as such that we
are basically affected by “dailiness”. Now, all those who have
responsibility are thinking to finish their day and the next day God is
great. This system has been affected by dailifness. Now we should accept
these problems and then think of their solution. All of this necessitates
that in the first place, we have to have a strong will for the solution of
the problems and in the second place trust and take advantage of the opinion
of experts, while there is not much room for them.
Mr. Akhoundi has said that they had 320 thousand billion tomans credit this
year; but the entire development budget was 57 thousand billion tomans; that
is to say 20% of the nominal budget; but in its real shape with the
inclusion of all the documents and future obligations up to 25 thousand
billion tomans; i.e. 9% has been realized. Well, how these figures and this
type of allocation can fit in a container with the slogan “coming out of
As long as we
fail to downsize the government and reduce costs, naturally the priority
would go to current expenditures not development ones. If we intend to root
out the problem, it is necessary to downsize the government and make it
efficient. Until the time this has not happened, what the government does
today is inevitable.
Well, given that we are in the last year of the Government of ‘Prudent and
Hope’, what is your evaluation of the economic performance of the
repeatedly announced that our evaluation is possible when exact economic
reports are put at the disposal of the experts.
Well, now the rate of economic growth has been announced at more than 9% and
the inflation rate at 8%. The amount of liquidity and the rate of
unemployment and … are also known…
The growth and
inflation rates… are natural. I am really surprised that certain people cast
doubts about these figures; as in post-JCPOA (Joint Comprehensive Plan of
Action), the jump in the growth rate and inflation control seemed natural;
because Iran’s economic capacities had remained too much vacant. The more
important point is that in the economic literature, the growth rate for one
year or several months is not the criterion; rather it is the long-term
growth, which is determining.