Friday, February 26, 2010

Inflation Rate Drops to 11.5%

Iran’s Central Bank Governor Mahmoud Bahmani announced in Tehran that the annual rate of inflation in the country for the past 12 months dropped to 11.5 percent, the lowest in four years.

Last year, the inflation hit an all-time high of 25 percent. Bahmani attributed the dramatic drop to the Bank’s monetary policies, especially the tightening of available cash. Last year’s dangerously high rates had been attributed to record high prices for oil, the country's main source of income, and converting the petrodollars into rial and injecting it directly into the economy.

The Central Bank’s ability to cut the inflation in half is a major victory for Iran and Bahmani’s leadership at the Central Bank ("Bank-e Markazi").


Anonymous said...

PBS report on Ahmadinejad’s economic policies:

Three nights ago there was a report on Iranian TV about the domestic food industry. Many food factories whose main products are canned and processed foods are going bankrupt. The reason is that they cannot compete with foreign products anymore. Because of high inflation and fixed exchange rate their products are becoming more and more expensive relative to their foreign competitors. The irony is that some of them are selling their famous brands to companies in China, Turkey and UAE. The consumer will not notice that he is buying a Chinese product with an Iranian brand.

Usually in a recession food industries are less harmed because of low fixed cost and low cyclicality. This implies that the situation in most other industries is far worse. Now what does this mean? In a recessionary environment, along with inflation, incoherent monetary policy plus expansionary fiscal policy plus removing subsidies plus appreciating Rial against foreign currencies is a recipe for disaster.

The last factor which can accelerate that will be oil price. The lower it becomes the faster we will be heading toward an economic depression. Even if oil prices keep rising in the next few years; like $100 per barrel, it will not be enough to cover the government budget. Finally add the effect of tighter sanctions especially on oil exports to that.

The signs of that disaster are slowly becoming clear. The amount of nonperforming loans to total loans in the whole banking system is above 25% according to Iran's Central Bank. Last week the research center in Majlis predicted that real GDP growth will be negative or zero next year for the first time after the revolution.

I will leave assessing the political effect of these for you to ponder.

Nader Uskowi said...

Anon 11:26,

Thanks so much for your thoughtful analysis. Please feel free to comment on Iranian economy as we enter into some crucial months ahead on the government's abilities or lack of in preventing a recession and/or a period of dangerous stagflation.