Inflation and money supply in Iran: a closer look
Last week, in a post on the Lobelog.com I noted further signs of moderating inflation. Prices in the Iranian month of Dey (ending 20 January 2013) rose by 1.7%, compared to 2.5% the month before and 4.5% per month in the previous two months after devaluation. These are high rates of inflation on an annual basis (see chart below), but a sign that the Central Bank may have found a way to keep the growth of money supply below the rate of inflation. I was curious enough if this were the case to look up money supply data published by the Central Bank and here is what I found. For the quarter that ended on December 20, 2012, which covers the three month period after devaluation, the rate of growth of money supply was 20 percentage points below the rate of inflation. (more…)
Iran’s hyperinflation myth
I just published a short piece in Al Monitor to refute the widely held belief that Iran has been experiencing hyperinflation. As I explain there, the myth originated in the application of textbook economics of hyperinflation to Iran, not taking into account two important facts. First, that the Iranian government does not have to print a lot more money just because the free market rate for the dollar tripled. This is because it sells foreign exchange, not buy it. If the government had to buy its foreign exchange from private exporters, then to manage its operations it would have to print money at an accelerating rate to meet its obligations. Second, because the government is the main supplier of foreign exchange, and is therefore a price maker, not a price taker, it can price discriminate, and sell forex at different rates (three rates now). Of course, there are limits to its price making ability. It can pour more money into the free market and lower the rate there, or sell more at the subsidized rate of 12260 rials per $ to keep inflation down. But since it has a limited (and shrinking) supply of foreign exchange, mainly thanks to the sanctions, it has to be careful how it uses its forex. If the Central Bank tries to feed capital flight or speculation (as in did in the early 1990s), it may look in charge for a while but soon will be sorry. (more…)
How large has been rial’s recent devaluation?
Iran’s multiple exchange rate system which has been in effect since last October has led to much confusion about the new dollar parity for the rial. Most people in Iran consider the “free” or parallel market rate, which has fluctuated around 30,000 rial per USD, as the new equilibrium exchange rate. Published Western reports have used a similar number. For example, an article in Foreign Policy last month put the decline in the value of the rial at 300%, which is not easy to interpret but probably means 3 times what it used to be a year ago (around 10600 rials per $), or about 30,000. A story in Washington Post yesterday noted that the rial had declined by more than 40 percent relative to its value in August — again, around 30,000 rials per $ since the free market rate in August was around 19,000 rials. A Reuters report today used the exchange rate of 30,000 to convert rials into USD. But has rial really fallen by this much? (more…)
Prices in Iran and what they mean for the PPP exchange rate
As I have argued in this blog and elsewhere, there is not a single equilibrium exchange rate for the rial. If you believed my rough calculations in my previous post, and if you needed to report only one number, the exchange rate would be something around 20,000 rials per dollar (about 96.5% increase over the old exchange rate of a little over 10,000). The next best thing after an equilibrium exchange rate (ER), one that is actually more useful for welfare comparisons, is the Purchasing Power Parity ER. Here are my back-of-the-envelop calculations of the PPP rate for Iran in 2012.
Rial devaluation and inflation — without the hype
For the past several weeks, the rapid fall of the rial has been linked to hyperinflation and a possible quick end to the impasse in nuclear negotiations with Iran. Inflation estimates of 196% per year in NYT, 70% per month in Boston Globe, and similar reports in Washington Post and Bloomberg, were all traceable to an article in the Cato website that had prematurely added Iran as the 48th worst case of hyperinflation in the world. Some commentators could hardly hide their joy in the prospect that sanctions were finally, and mercifully, about to spare the Middle East yet another war and the Iranian people years of suffering under sanctions. But these predictions have failed to materialize, and the media interest in the issue has waned. We are slowly hearing the other story of the rial devaluation, its positive effect on local production (see, for example, Jason Rezaian’s informative report in Saturday’s Washington Post).
More on the falling rial
I have not been able to write much on this blog because I have been trying to catch up on my research. But the rial troubles in the last two weeks have been impossible to ignore. I am not a macro economist, but some of what the media was reporting about the freefall of the rial even I knew was over-sensationalized — hyperinflation, economic collapse… and one Iranian BBC reporter said he had run out of words to describe it! Yesterday I tried to explain on the lobelog three things. (more…)
Lost in translation: A quick note on exchange rate policy in Iran
Something important was lost in translation in an article of mine published in yesterday’s Donayey Eghtesad, which discussed the dual exchange rate system in Iran, and which I needs to correct. The article discusses the perils of the two tier-exchange rate policy, emphasizing the difficulty of preventing inefficiency and corruption when the Central Bank provides foreign exchange at a discount of 80% relative to private sellers. Who should be getting the discounted dollars and euros is a task no government should undertake, unless under emergency conditions. Iran has been under emergency conditions for the past several months, so exchange rate unification may not be the most important objective to pursue; having enough foreign exchange for basic imports and fighting inflation are. (more…)
Sounding the wrong school alarm in Iran
A series of articles published three weeks ago (Wednesday May 9, 2012) in Donyayeh Eghtesad (DE) reported on a “shockingly” large number of Iranian children who are “deprived of access to school”. Iran has very serious education problems, but lack of access to school is not one of them. The quality of education is poor and returns to formal schooling below the university level are low, prompting discouraged youth to leave schools after age 14 at alarming rates. At the same time, 99% of children are enrolled in school by age 7 and persist at a high rate until age 14 (first year of high school). This is when the realization sinks in that staying in school will not earn them a place in a good public university or the school officials tell them they are not fit for academic work and must choose between two losing options: vocational education or kardanesh. Why waste three more years of studying when the end result is a high school diploma that has not been of any value for several decades? Trying to get these kids to stay in school, as the articles in DE seem to prescribe, without doing something about job prospects after graduation serves no individual or social purpose. The problem for these kids is not lack of schools, or even boring classes: it is lack of purpose. The education system on its own cannot deal with this problem; it is a problem for the larger economic system.
Policy reversal on interest rates in Iran: Is it enough to revive the rial?
After weeks of wrangling, on Wednesday, January 25, President Ahmadinejad has consented to the request from his Central Bank to sharply raise interest rates (officially referred to in Iran as “the rate of profit of banks”), from 12.5% on one-year deposits to over 21% and higher. The argument for increasing deposit rates is simple macroeconomics: when interest rates are below the rate of inflation, as they have been in Iran for the last two years, people will try to protect their savings by shifting their money to other liquid assets, such as foreign currency and gold. According to some reports, this theory was put to a quick test when the price of dollar and gold dropped on the same day that the hike in deposit rates was announced. At the same time, the Central Bank has announced that it will unify the exchange rates at 12,260 rials per dollar, which is an official devaluation of less than 10%. But, as welcome as these pragmatic steps are, they may not be enough. Higher interest rates will do some good, but are unlikely to lower the market exchange rate to the new official rate. These are complicated times in Iran and simple macroeconomics may not apply. (more…)
The fall of the Iranian rial: too much of a good thing?
In Tehran’s volatile currency market the rial fell to its lowest level ever today (January 2, 2012), the US dollar closing above 17,000 rials. The devaluation of the rial that started at a gradual pace over a year ago, and was largely expected and welcomed by economists, accelerated, going from less than 11,000 to around 15,000 rial per dollar in a matter of weeks. The additional fall in rial of about 10% in the last two days raises the question if the correction has gone too far. To answer this question one needs to have some idea of what is the right rate of exchange for Iran’s currency, something that you are unlikely to find in standard economics textbooks. There are two reasons why the market clearing price is not a good guide to the value of the rial: sanctions and oil.
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