Radiofarda – The research center of Iran’s Parliament (Majles) has warned against “uncontrollable inflation” before the end of the current Iranian year in late March.
The parliament’s research attributes the looming hyperinflation to “the quantity and quality of liquidity growth in recent years, fluctuations in the forex market and price rises during recent months.”
According to the report, liquidity has more than tripled between 2013 and 2018, rising from 5,063,000 trillion rials to 16,720,000 trillion, adding that during the period a large part of the cash in the market consisted of various forms of travellers cheques or quasi-money so that bank notes constituted only 15% of the money in people’s hands.
If we convert these figures to U.S. dollars based on the current free market rate, it would be $500 billion and $1.5 trillion respectively; but this does not mean Iranians have actually the equivalent of so much dollars. Their money is in local currency, which is not as fungible as a hard currency, such as the U.S. dollar.
The growth in liquidity means that the government has printed money to pay salaries and bills. Then what about inflation? So much liquidity is bound to lead to loss of value for the money.
Actually, there is double digit inflation approaching hyper-inflation. But so far, it has been somewhat controlled because of very high interest rates, the parliament report says, and the fact that a lot of the money in circulation is not in the form of banknotes.
However, if availability of actual money increases, hyperinflation will be unavoidable, the report concludes.
The parliament’s research center has suggested three solutions for the problem of liquidity and high inflation: Reducing the volume of liquidity, managing and controlling the existing liquidity level, and managing the creation of new liquidity.
The research center has advised that banks should sell their surplus assets, control high-volume banking transactions and try to stabilize the foreign exchange and gold coin markets.
Other measures suggested by the Majles research center to control inflation include taxing capital gains on foreign currency, gold coins and real estate, facilitating long-term deposits for two years or more, and reducing the interest rate on short-term deposits.
Central Bank Governor Abdolnasser Hemmati in late September called on Iranian banks to sort out the overdrafts they owe to the Central Bank.
Meanwhile, Hemmati criticized “some of the banks and credit institution” for the “rising imbalance between their resources and spendings,” adding that “overdrafts in the banks’ accounts with the Central Bank is against the objectives of the Central Bank and its inflation control policies.”
Overdraft from central bank resources causes high liquidity risk and will have serious negative impact on inflation.
One of the current concerns in Iran’s economy is that a change in the combination of liquidity by shifting from quasi-money to bank notes and withdrawal of bank deposits in order to make profit in the forex market can lead to a rise in inflation in the coming months.
According to the Iranian Statistical Center, the average inflation rate in Iran in December reached 18 percent, which shows a 2.4% rise when compared to November.
The Iranian Statistical Center has calculated the year on year inflation in December as 37.4 percent. If this number reaches 60%, then it will be considered as hyperinflation. Some economists believe the official statistics underreports inflation and Iran might already be in hyperinflation territory.