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Inflation; A Big Challenge For Rouhani’s Second Term

President Hassan Rouhani in the meeting with top managers of National Development Fund, July 02, 2016.
President Hassan Rouhani in the meeting with top managers of National Development Fund, July 02, 2016.

In late March, the Iranian central bank announced that inflation in the previous Iranian calendar year, 1395, had dropped to 9%. The bank made a point in its announcement that for the first time in 26 years, Iran’s inflation rate had become single digit.

Only a little over three years earlier, Iran’s real inflation rate stood at 40%. Indeed, President Hassan Rouhani could claim an important economic victory in his first term.

However, economists did not believe that the downward trend could continue much longer.

As predicted, in the first Iranian month of 1396 (March 21-April 21, 2017), inflation crept up to 9.5%. More bad news followed. The Central Bank has now announced that in the second Iranian month inflation has reached 9.8%, or just a step-stone away from a double-digit rate.

Two observations are important here. First, even at 9%, Iran’s inflation rate, compared to most countries, is still very high. According to the World Bank data, average inflation in the world was 1.6% in 2016.

However, and as our second observation, it cannot be denied that the Rouhani government had a major achievement in establishing some control over inflation.

Fiscal discipline by the government has been one of the major factors in the inflation story. While during Mahmoud Ahmadinejad’s government money was printed and pumped into the economy, Rouhani’s administration exercised a more restraint.

Better fiscal planning and an end to many crippling international sanctions also played important roles in during the last two years.

Why is it so hard to lower the inflation rate in Iran to a percentage closer to the international average?

The simple fact is that Iran suffers from many fundamental and structural economic problems that have become an inherent part of the governance system of the Islamic Republic.

The money supply in Iran surpasses the volume of economic activities – a recipe for inflation. A government that is always short of money, because of un-controlled spending, keeps printing money to pay for goods and services.

In countries with healthier economies, private and foreign investments oil the economic machine. In Iran, because of a big government and quasi-government sector and lack of foreign investments, that burden falls on the central bank, which has no political independence. Therefore, it has a hard time exercising fiscal discipline.

Lack of a healthy and growing private sector, weak fiscal planning and discipline and a currency, which has depreciated manifold in the past few years, will make it very hard for the second Rouhani administration to keep inflation relatively low.

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    Fereydoun Khavand

    Fereydoun Khavand is a French-Iranian economist living in Paris. He has been teaching at various French universities and is a regular contributor to Radio Farda as an economic analyst.