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October 2022, No. 101


Inflation

"Inflation" the Most Important Economic Issue


The government is apparently happy because by creating 40% inflation to cover its own expenses, it reached into peopleís pockets and took away 40% of their income.


If inflation in Iranís economy remains at around 40% per year and does not go higher, what will happen to the Iranian economy and society in the coming years? Chronic and high inflation will gradually eat all economic and social foundations and pillars like a termite and bring it close to collapse.

Economist Mohammad Mahdi Behkish says that if this trend continues, the government will not even be able to increase the salaries of its employees, as was the case this year; despite the 40% inflation, only 10% was added to the salaries of government employees, and it will probably be even less for the following years. He says that although the main problem is inflation, in order to solve inflation, several issues such as the budgeting system, the banking system, and international relations must be corrected and changed side by side in order to curb the rebellious horse of inflation. 

Iranís economy has experienced a high inflation rate with an average of about 20% for several decades. In the last three years, this rate has reached about 40% and it seems that it will remain around these high rates this year and in the coming years. With this trend, where will inflation take the economy?

In my opinion, the biggest problem of administering a country in the area of economy is the control and regulation of inflation, because many factors are directly or indirectly affected by inflation, and the balance of different fields is disturbed by the increase in the general level of prices. However, the society does not have a very clear understanding of all-round effects of inflation, except that it observes the price of a product, which last year was, for example, 10 thousand tomans, this year it is 15 or 20 thousand tomans, which is a common and tangible result of inflation; but chronic and high inflation has many economic and social effects that will show itself in the long run. In the meantime, policies are also considered, such as changing the governmentís preferred currency for supplying basic goods to the NIMA (forex management integrated system), which causes the price of some goods to increase four to five times. In such a situation, all the planning of the household, company and even the government for budgeting and investment will be disrupted.

By not checking inflation, the government upsets the balance of the economy. The government is apparently happy because by creating 40% inflation to cover its own expenses, it reached into peopleís pockets and took away 40% of their income. The government is the beneficiary of inflation, but it is the peopleís table that gets smaller and the household is forced to reduce expenses such as education and health, which will have harmful implications for the society.

At the same time, the ground for continuous discontent and protest and rebellion is also prepared. The fact is that the government has taken a very bad approach in dealing with inflation; If it understands and knows what it is doing and it is more or less aware of the roots and effects of inflation, it should know that it is destroying the foundations of the society and the economy. If it does not understand, it will be a lame excuse because it shows that it has not been able to gather good specialists and experts who can untie the knot of inflation.

Unfortunately, it is a fact that many of our officials do not know economics and are unaware of economic mechanisms. Thatís why, regardless of the mechanism of price discovery, supply and demand, etc., they keep saying that we should control prices. Because of this control and in fact price suppression that has been applied in the last five or six decades, today all resources from water and soil to banking resources and agricultural power have reached the lowest level. Anyone who has understood the first lesson of economics, which describes supply and demand in microeconomics, will no longer talk about price control.

Finally, let me say that if the situation continues like this, the government will not be able to afford the increase in the income of its own employees, and there will be a lot of pressure on the people in the coming year, which will also increase exponentially. The private sector also becomes weaker because on the one hand, the producerís costs increase with the increase of the minimum wage, and on the other hand, the price increase is prevented by pricing, and naturally the private sector becomes unable to pay wages. Pricing must be dismantled to create competition. It should be a condition that investment is made, which comes with technology and creativity. It is in this way that production increases, the cost of production decreases, and gradually people can live a more comfortable and quality life.

Why canít we control the inflation?

The root of inflation is the governmentís budget deficit. It means that the government spends more than it earns and its expenses are more than its income. When the government does not have enough income to cover its expenses, it has to borrow from the people. For example, it explains that it doesnít have enough money to implement a big project like a dam, so it issues bonds and pays off the loan plus interest after earning it. In our country, firstly, the government has a deficit for its current expenses, and secondly, if bonds are issued, it must reap high profits, and again, people are not buyers of these bonds, and finally, banks are forced to buy the bonds. Banks that have spent part of their resources to buy bonds, the interest rate of their facilities is determined by the government.

On the other hand, they are faced with loan facilities and all these factors cause a lack of resources and borrowing from the Central Bank. To fill these holes, the central bank is busy printing money, which causes inflation. In fact, with the pressure of the government and with the pressure from the banking system, money printing and money creation are done at a high speed and liquidity grows rapidly, which eventually turns into inflation. This cycle of inflation continues until the government budget is balanced.

I am not saying that the economy should become Western or Eastern; I will not enter into these labeling issues. In the economy, there should be a simple way to invest, so that if someone wants to invest in this country, he can do so easily, and if he wants to withdraw his money after a few years, he can easily do so. Now the name of this approach is whatever you want. Unfortunately, we have reached a point where I think that every economic decision made by the government has been flawed. 

Is inflation the most important issue of the economy?

The most important issue of the Iranian economy and the main root of our other economic problems is ďinflationĒ. To curb inflation, the government budget should be balanced, the price should be determined based on the market mechanism and supply and demand, and the government should stop involvement in economic activities and pricing.

Then you can think about curbing the inflation and hope that investors will come, and all these direct and indirect factors depend on our international relations, that we interact and trade with many countries. Currently, our economy is full of uncertainties. Ask any economist what will happen in the economy next year they will not be able to answer your question because the economy is unstable. An investor needs to be able to analyze at least five years ahead. To be able to estimate his expenses in the next five years with a good approximation to understand whether the investment he intends to make is profitable or not.

When we face the economy with uncertainty, it is clear that investment would not take place. Even domestic investors who have, for example, a factory would not invest for its expansion and development. Along with inflation, the issue of pricing, international relations, reforming the budget system, etc., all have priority and are linked together. These factors must be corrected to control inflation. Letís not forget Inflation is not controlled by force and mandated pricing!

 

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