Iran’s Inflation showing signs of moderating
The Central Bank of Iran has just released the Consumer Price Index for the month of Azar (ending on November 20, 2012), and it shows a much smaller increase in prices than the previous two months. The index rose by about 4.5% per month during the last two months (equal to 70% annually), but its pace moderated in Azar, rising by 2.5%. This is still a sizable increase (about 35% annually), but it may be a sign that the large devaluation of the rial during the last week of September has run its course and consumers maybe back in the territory that, unfortunately, they have come to regard as normal: prices rising by about 20% per year. This is, of course, conditional on no new shocks happening to the exchange rate or the money supply in the near future.
But such moderation in inflation, if it happens, will not keep the inflation rate for the year (1391 = 2012/2013) to below 30%. If in the next three months prices continue to rise at the same rate as they have in Azar, the inflation for the year will stay below the 40%, but not by much. This is a bit higher than the inflation rate that I assumed in my previous post, but below the record set in 1995, when prices rose by 50% (and a whopping 144% annual rate in the month of Bahman). The 1995 inflationary period also started with a botched devaluation and as followed by two years of zero economic growth. The prospects for this year of high inflation are worse because sanctions are preventing the supply side (both imports and domestic production) from moderating increases in prices, so it is harder now to control inflation than in 1995, and for the same reason the cost in terms of unemployment will be higher.
Sanctions are only part of the reason for high inflation; domestic policy is the other. Two policies in particular have contributed to inflation: subsidy reform and maskan mehr (a low cost housing program). Both have entailed borrowing from the Central Bank, which expands liquidity and fuels inflation, because they were not self-financing. Subsidy reform was inflationary because it was undoing decades of price controls, but it did not have to be deficit expanding if the cash payments were in line with the money from higher energy prices. These are the signature programs that will likely define Mr. Ahmadinejad presidency, so he may not be willing to scale them back in the last six months of his last term. But if he prefers his legacy to be also about leaving a stable economy behind, there steps he can take.
The hole in the subsidy reform, some $15 billion, is easier to fill than the larger one left open by the low-cost housing program. To fill this hole all the government has to do is raise energy prices while keeping the total cash transfers to consumers constant. It can do this the easy way, by keeping the transfers at their current level of 450,000 rial per person per month, or he can do it the hard way, by limiting payments to the poorer two-thirds of the population only, which would allow individual transfers to go up to 600,000 rials. Either way, the government would be able to bring into balance the money it collects from energy consumers and what it pays back to households as cash payments. At this point the parliament is steadfast against continuation of the subsidy reform in any form or shape, but it may reconsider if the President were willing to offer a balanced plan that would not entail borrowing from the Central Bank.
Bringing the low-cost housing program out of the red is another matter because the collection part is all but over. Buyers of these units have prepaid a small sum (about 120 million rials) as down payment and are expecting to pay about twice that before they can move in. These amounts may have been enough a year or two ago when they signed their contracts, but will not cover the cost of their homes now. They may not easily fork over the extra money that would keep the building contractors busy and prevent the government debt to the Central Bank from ballooning further.
But if anyone can persuade the would-be owners of these low-cost units that paying more for them is not the usual balancing of the budget on the back of the poor, it is Iran’s populist president. Perhaps implementing a more progressive second phase of the subsidy reform while asking for more contributions for completed housing units from the lower-middle class would convince them that in re-configuring these programs he has their interests at heart.