Iran News ...


12/11/07

Iran Economy Overview: October 2007

Source: Turquoise

 

One of the main topics of discussion in the public sphere and one of the major concerns about the Iranian economy has for a long time been inflation levels in Iran that have remained relatively high for the past three decades.  The recent rise of the inflation rate, which many economists blame on President Ahmadinejad's economic policies, has again raised some concerns for economists. These policies include increased expenditure of the crude oil windfall in the annual budget, providing cheap loans to Small and Medium-sized Enterprises (SMEs) as well as young couples, and imposing an interest rate cut on both the state-owned and privately-owned banks on an annual basis.  In this edition of the Economy Page, a detailed analysis of the country's inflation problem is discussed.

 

According to annual reports published by the Central Bank of Iran, the country's Consumer Price Index (CPI) has consistently increased during the last ten years and has quadrupled from 1996 to 2006. This is while the annual rise in CPI, which demonstrates the 12-months inflation rate, has been volatile over the last ten years and has varied from the highest recorded rate of 23.2 percent in 1996 to the lowest rate of 11.4 in 2001.

 

The following chart shows the annual inflation rate recorded from 1996 to 2006. Please note that the figures are based on the Iranian calendar. For example 1996 figure corresponds to the Iranian year of 1375 which ended on 20 March 1997.

 


Analysts believe that the main reason behind the drop in inflation levels in the year 2005 and 2006 was a decision by Parliament and the Government to fix the prices of 12 vital commodities and services in this period.  This policy was successful in reducing the inflation rate by around two percent but was inherently a short term solution to the long-term problem of the country's increasing levels of liquidity which is the real cause of the high inflation rate.  This policy, which was opposed by the business community and manufacturers, was doomed to eventually fail as the cost of raw materials and labour was increasing and it was impossible to keep the price of  goods at a fixed level without causing serious harm to businesses. This is the main reason why the inflation level this year bounced back and has been rising month on month since the beginning of the year. Many analysts believe that the real inflation rate is significantly higher than the one announced by the Central Bank and question the methods and the basket of goods that the Central Bank uses to calculate the CPI across the country. Considering that Iran's liquidity level has almost doubled over the past two years (from $80 billion in 2005 to $150 billion in 2007), analysts believe that the real inflation rate should be around 25%.  The Parliament's Research Centre announced a few months ago that the real inflation rate in fact is around 23%. The Central Bank, however, dismisses the claims and points out that it is the only credible source with sophisticated data collection methods that are implemented across the country for calculation of the CPI level and the inflation rate. The methods used by the Central Bank of Iran have been approved by the International Monetary Fund (IMF) and therefore data produced by the CBI is often referred to as the real inflation rate in the country.

 

Regardless of the methodology for calculation of the CPI, almost everyone agrees that the ever-increasing growth rate of Iran's liquidity levels is reaching alarming heights and the rising inflation rate is turning into a real economic problem. The following chart demonstrates the rising level of 12-month inflation on a month to month basis during the last few months since the beginning of the Iranian year (rough equivalence of Iranian calendar months):
 

 

If this rising trend continues, analysts believe that the inflation rate by the end of the current Iranian year in March 2008 will reach around 18%. 

 

The government has been trying to fight the rise of inflation by the mandatory pricing of some commodities and increased import of consumer goods while reducing the tariffs of some imports. Although sometimes successful as short-term solutions, these policies are proving largely ineffectual in combating rising inflation and could prove harmful in the long run since the dependency on imports increases. Another problem is that with little investment options available, most of the country's liquidity moves towards sectors in which neither a pricing mechanism nor imports are possible, such as the real estate sector in particular.  The price of property has risen significantly in Iran over the past year by an average of around 30% across the country, while in places like Tehran this rise has been more than 50%, making the purchase of a small apartment unthinkable for many young couples.

 

Some analysts believe that the change of the Governor of the Central Bank a few months ago was aimed at keeping a tighter control on bank loans in order to contain the inflation rate from rising even further. It is yet to be seen whether this change could result in a reduction of the inflation rate in the months to come or not but according to the IMF's forecast, the inflation rate will reach 19 % by the end of 2007 but will drop to 17.7 during 2008 which will still be amongst the highest rates in the world.

 

 

About Turquoise: Turquoise is a boutique investment bank based in Iran with offices in Tehran and London. Turquoise publishes Iran Investment Monthly with the aim of keeping its recipients updated on the latest macroeconomic developments in Iran, providing an in-depth analysis of the Tehran Stock Exchange as well as introducing new financial products and private equity opportunities to potential investors. For more information please visit: www.turquoisepartners.com/iraninvestment

... Payvand News - 12/11/07 ... --



comments powered by Disqus

Home | ArchiveContact | About |  Web Sites | Bookstore | Persian Calendar | twitter | facebook | RSS Feed


© Copyright 2007 NetNative (All Rights Reserved)