July 2009, Nos. 52&53

Economy

Inflation Rate for 2009 Targeted at 10%

Dr. Seyed Shamseddin Hosseini, Minister of Economic Affairs and Finance

When inflation was being compared to the inflation rate in October 2007, it was 29.5 percent.

Efforts made to reach a 10-percent inflation rate is the most recent and perhaps, the most misleading promise given by Seyed Shamseddin Hosseini, the ninth government’s minister of economic affairs and finance. He announced this in an interview with reporters on the sidelines of a recent cabinet session.

Inflation means excessive and uncontrolled increase in prices. According to the Fourth Economic, Social, and Cultural Development Plan Act (2005-2009), inflation should go below 10 percent by the end of the plan. However, due to insistence of the conservative government on expansionary financial policies through high oil revenues, the inflation rate has increased from 12.1 percent in 2005 to 25.4 percent in 2008. The rising prices have eroded people’s purchasing power and have increased the poor population. According to the latest figures produced by the Central Bank of Iran (CBI) based on its own model, the inflation rate has stood at 25.4 percent in 12 months ending in March 2009, thus, reducing people’s purchasing power by about 26 percent.

Government’s insistence on spending petrodollars has raised inflation to levels much higher than countries like Afghanistan. According to CBI statistics, Iran’s oil revenue in 2005, 2006 and 2007 totaled 198 billion dollars and, at least, 70 billion dollars for 2008. The government has used up all that money. In the most optimistic case, the balance of the Oil Stabilization Fund has been put at 20 billion dollars. From 2001 to 2004, about 18 billion dollars (17.7 billion dollars) has been withdrawn from the Oil Stabilization Fund. Under four years of the ninth government, at least, 60.3 billion dollars has been withdrawn from the Fund, which in some estimates adds up to 63.5 billion dollars. In other words, the ninth government has withdrawn as much as 3.5 times of the eighth government from the OSF; that is, 45.5 billion dollars higher.

Experts maintain that if the fourth government had complied with the Fourth Economic Development Plan Act, the Fund should have contained about 150 billion dollars now, which could have helped the country’s development under present circumstances. However, spending that much money has not benefited Iranians and, at the same time, inflation has risen on the contrary to the Fourth Economic Development Plan’s projections.

According to international figures, Iran ranked five among countries with high inflation in 2007 with an inflation rate of 19 percent. Out of 180 countries studied that year, Japan’s inflation stood at zero while Afghanistan fared better than Iran with an inflation rate of 8 percent.

In 2008 and out of 225 countries, Iran registered an inflation rate of 17 percent and ranked sixth among countries with high inflation. In that year, Afghanistan’s inflation was still below Iran. In 2008 and out of the said 225 countries, only 29 countries had two-digit inflation rates and the rate was below 15 percent in 210 countries. The alarming situation of inflation in Iran is against the ninth government’s allegations which claims to be justice-centered and helper of vulnerable social classes. Economists maintain that inflation is the most unfair tax to be taken out of the poor’s pocket in the benefit of rich ones. Since low-income classes spend most of their unremarkable income on essential goods, inflation higher than 15 percent will hit lower social classes worse.

The ninth, so-called justice-seeking government has spread injustice through its policies and statistics released by the Central Bank of Iran and the Majlis Research Center, which rely on such indexes as Gini coefficient, has shown that injustice is on the rise. However, the ninth government officials try, through manipulating inflation measurement indexes, to show that inflation is lower than unofficially announced and keep telling people that it will further fall. At the same time, economists believe that given the government’s inflationary budget for the current year and an expected budget deficit of tens of thousands of billion tomans, the inflation will continue to rise above 20 percent. Of course, global reduction in inflation has helped Iran somehow because in other cases, the current inflation would have been above 25.4 percent.

There are also other challenges involved. To make up for its budget deficit, the ninth government insists that subsidized prices of gasoline, diesel fuel, water, power, and natural gas should be suddenly raised through reallocation of subsidies. Ahmad Tavakkoli, a Tehran MP and head of the Majlis Research Center has noted that reallocation of subsidies will take the inflation to above 50 percent. Pashaeifam, deputy governor of the Central Bank of Iran for economic affairs, has optimistically announced that reallocation of subsidies will increase inflation to above 36.5 percent, but the ninth government will reduce it to about 10 percent.

The story still goes on. The ninth government officials have frequently used the main model for measuring inflation and announced its resultant manipulated figure, as inflation rate. However, they have been using an accessory model for a while according to which, the inflation rate was announced 17 percent in March 2009 compared to the corresponding period of the preceding year (March 2008). Anyway, according to the main model used by CBI, the inflation rate in 2005, 2006, 2007, and 2008 respectively stood at 12.1 percent, 13.6 percent, 18.4 percent, and 25.4 percent. If they want to use the accessory model to justify their policies, they should note that people, especially low-income classes, suffer from outcome of inflation in their everyday lives.

Now, let’s review Seyed Shamseddin Hosseini’s remarks to see how he has put the promising words together.

Asked about lowering inflation, Hosseini said that last year, when inflation was being compared to the inflation rate in October 2007, it was 29.5 percent. He added that the figure had reduced to 17.8 percent in March 2009 compared to March 2008. “Our goal is to reduce the inflation rate to below 10 percent,” he opined.

Hosseini also quoted governor of CBI as saying that the inflation rate will be reduced to a one-digit figure. Anyway, the Fourth Economic Development Plan Act has stipulated that inflation rate should fall to 6.8 percent in the current Iranian calendar year (started March 21, 2009).