Iran, Inflation, and the future of the country

Morteza Aminmansour

The election of Ahmadinejad in 2005 on a populist agenda promising to bring oil revenues to every family, reduce the poverty, improve living standards and tackle unemployment.

Now he is being challenged for his failure to meet those promises. Central Bank of Iran figures for November showed prices of basic commodities and services rising at a 19 percent while overall inflation is running at a 16.8 percent rate annually - double the pace it was when Ahmadinejad took office in 2005. But independent economists and experts put the inflation rate well above 30 percent.

The price of basic commodities has clearly jumped in many places in the last few months. Prices for fruit and vegetables have almost tripled in the past year in many shops, and housing prices in many neighborhoods have more than doubled since last summer thanks to his economic plan for Iranian nation, one of the reason behind this inflation is; the government increased liquidity, or the amount of money in circulation, flooding the market with too many newly printed bank notes (Some emphasize increasing interest rates by reducing the money supply through monetary policy to fight inflation ), relying too much on imported goods - including basic commodities - and using oil revenues to pay for the government's day-to-day expenses instead of distributing it to the people .

Inflation is a reality. If a fundamental solution is not found, Iranian are going to see harder days in the next two or three years. The source of inflation is the government itself. It needs to rectify its economic behavior in order to control inflation.

However, once inflation rises above certain levels, it can distort decision-making and can have negative effects on the economy and growth, which is visible in Iran.

Central banks can impact inflation to a significant extent through setting interest rates and the use of monetary policy. High interest rates (for example in Iran, Azerbaijan, Pakistan) are the method of fighting inflation that Central Banks often resort to in order to fight inflation, using the resulting decline in production and unemployment to prevent price increases.

Another way to fight inflation by pegging the exchange rate between the currency and a stable reference such as the dollar. In spite of efforts to curb inflation, Iranian nation has experienced double-digit, some other countries even have been experiencing triple-digit, astronomical annual rates of inflation in recent years.

Inflation inequality has also attracted some attention in some developing countries. For the case of Argentina, which experienced large fluctuations in inflation over 1989-1998, that on the whole the poor suffered lower inflation than the rich in high-inflation years, and the opposite happened in low-inflation years. For Taiwan in 1991-96 inflation was persistently higher for low-income and urban households.

Higher inflation does appear to reflect overheating in several middle-income countries, including Argentina, India, South Africa. At the regional level, inflation has increased in each of the past three years in the Middle East and North Africa and in each of the past six years in South Asia. In Central Asia, some countries have combated rising inflation with tighter monetary policies, while in others policy has either been neutralized by capital inflows or too timid in response to increased price pressures.

The pickup in inflation over the past several years, coupled with very rapid growth, has contributed to rising short-term interest rates and the gradual removal of monetary policy stimulus in many countries. Despite increases in inflation, real short-term interest rates in most regions are low by historical standards and have been relatively stable or even falling (notably in South Asia) in recent years.

While developing-country bond markets were shaken and volatility in bond and equity markets increased (particularly among the most vulnerable countries and those with large current account deficits, such as Turkey, Iran, Pakistan, Azerbaijan), emerging markets suffered relatively minor ill effects from these episodes. Over the past three years, the average contribution of demand from oil exporters and low-income oil importers to U.S.Europe by even more, reflecting the expansion of trade between Europe export growth was 8.7 percentage points (5.2 percentage points for low-income countries alone). Oil exporters and low-income oil importers are boosting exports in

Iran has the second largest population, after Egypt, in the Middle East and North Africa region.  Most of its 71 million people are young, with increasing hopes and expectations of a better future. Larger numbers of increasingly well-educated women seek opportunities to participate at all levels of Iran’s labor market and civil society. The country’s health and education indicators are among the best in the region. Iran joined the World Bank in 1945. Since then, the focus of World Bank assistance has been to foster sustainable economic growth and reduce poverty in the country.

In April 2001, the World Bank adopted an Interim Assistance Strategy for Iran.  The Strategy was developed in close partnership with the Government of Iran and serves as a roadmap for World Bank assistance to the country.

This Interim Assistance Strategy for Iran seeks to update on the current development situation in Iran, report on the progress of the process of reforms, and highlight the development challenges and prospects faced by the country. It outlines the assistance strategy that the Bank Group will follow while preparing a Country Assistance Strategy (CAS).

Iran is a large country that is emerging from a long process of international isolation and economic embargo because of its nuclear energy and its support for the political groups in Lebanon and other countries that limited its normal access to long-term financing opportunities for its development needs. In support of the country's intention to move forward, the Bank will intensify economic and sector work covering the main areas, and provide support for capacity building in the formulation of economic and sector polices,

Their sequencing, and implementation. This non-lending support will also be useful in the preparation of the full CAS. On the lending side of Bank assistance, Bank lending volume will gradually increase to significant levels by following a transitional assistance strategy which can, over time, lead to fuller involvement in 2-3 years. Lending during this transitional period will focus mainly on priority areas: low income housing, sewerage, urban upgrading, and community-based infrastructure and employment creation schemes for the poor.

Morteza Aminmansour can be reached at moryamin@yahoo.com