Iran’s Inflation Hits 21.5% As Majlis Approves Budget Bill Outline

Iran’s Inflation Hits 21.5% As Majlis Approves Budget Bill Outline

The official inflation rate in urban areas in Iran stood at 21.5% for the Iranian year 1390, which ended on 19 March, the Central Bank of Iran (CBI) has said. Many clerics, lawmakers and independent economists believe that the real rate of inflation is much higher, with some even suggesting it could be as high as 100% in recent months (MEES, 9 April). Analysts maintain that official statistics on Iran are uncoordinated, contradictory and even incredible. Meanwhile, a parliamentary commission has approved the budget bill outline after first rejecting it. MEES editors report.

Announcing its inflation rate estimates on 8 April, the CBI noted that prices in the final month of the year rose by 3.4% from the previous month (equating to 49% on an annualized basis). The official rate for the previous year 1389 ending on 20 March 2011 stood at 12.4%, after reaching a low of 8% in August 2010 (MEES, 11 April 2011). But the rate began to edge upward with the implementation of the economic reform bill in December 2010 and the gradual withdrawal of subsidies on goods and utilities.

The inflation rate has also risen in recent months with the continuing depreciation of the value of the Iranian rial and tighter international sanctions on trade (including crude oil) and financial transactions, including the disconnection of Iranian banks from the SWIFT electronic payment system. The CBI has set a fixed official exchange rate of $1=IR12,260 in January, but the prevailing market rate in the real economy has been close to $1=IR20,000. This has raised the cost of living in the country and made imports more expensive.

The government appears to be in a dilemma over how to deal with its exchange rate policy. It announced earlier this month that it was restricting the import of some foreign goods in order to curb demand for foreign exchange (MEES, 9 April). But a few days later it said it would provide subsidized foreign currency for around half of the goods imported in the country in the new year. According to an official quoted by IRNA, over $30bn would be made available by the government to importers at the fixed rate, based on the previous year’s figures for imports.

Commission Approves Budget Outline

Meanwhile, in a rather confusing manner, the parliamentary Budget Consolidation Commission first rejected the budget bill outline on 8 April, but a day later approved it. A member of the Planning and Budget Commission, Musa Reza Servati, gave a number of reasons for the rejection of the budget bill. These include neglect of the targeted subsidy plan regulations, lack of clarity about exchange rates, failure to provide realistic figures on revenues, unclear budget limits, no details on the issue of government bonds, problems related to budget distribution and incompatibility of some articles of the budget with the objectives of the fifth development plan (2010-15). The budget is due to be debated by parliament by end-April. Usually when differences arise between the government and parliament, Supreme leader Ayatollah Ali Khamenei steps in to patch up the differences. But in this latest incident there were no reports of intervention by the leader.

The speaker of parliament Ali Larijani is also at odds with the government over the targeted subsidy plan. He maintains that the implementation of its second phase was illegal because it needs prior authorization from parliament. The government in March raised the amount of the monthly cash handout paid to Iranians under the second phase of the targeted subsidy plan by IR280,000 from IR450,000 without parliament’s green light (MEES, 9 April). Mr Larijani has reportedly written to Ayatollah Khamenei requesting him to stop the implementation of the second phase of the plan. Other deputies have called for a meeting with President Mahmoud Ahmadinejad and his ministers to clarify issues related to the second phase. In implementing the plan, the government is accused of having ignored productive industries, by failing to allocate a part of the savings made from the withdrawal of subsidies to those industries. This in turn has led to the closure of some industries and the laying off of workers.

The targeted subsidy plan also came under fire from former president Ali Akbar Hashemi Rafsanjani, who warned that “the distribution of national capital in the form of cash not only hurts the economy, but also it will be a social threat in the long run.” Mr Rafsanjani, who is close to the reformist camp and is excluded from the political elite in the country, has also admitted that “sanctions will naturally have negative effects on the economy and that Iran should reduce their adverse effects by restricting international challenges.”

Iran Saves $35Bn In NDF

Mr Ahmadinejad announced on 7 April that some $35bn had been transferred to the National Development Fund (NDF) in the past two years and that the assets in this sovereign wealth fund could reach $55bn by March 2013. The president said that all previous administrations spent their annual oil revenues and never saved a single dollar. But this claim is hard to verify, given the lack of transparency that shrouds the NDF and its predecessor the Oil Stabilization Fund (OSF), which was established during the Khatami administration in the early 2000s. At the time officials gave more frequent reports about transfers into and disbursements from the OSF. 

The NDF was established under the fifth development plan to channel oil and gas revenues to productive investments for future generations. In the past, 20% of these revenues were set aside for transfer to the NDF and this ratio would rise to 23% and 26% in the next two years respectively, the president stated. The balance in the OSF was transferred to the NDF after its establishment in 2010. But reports on movements in this type of sovereign wealth fund are unavailable.

Iran has earned $100bn from its oil exports in the year ending on 19 March, a deputy head of Iran’s Trade Promotion Organization, Kiomars Kermanshahi said last week. Encouraged by these figures, Mr Ahmadinejad, who denies that sanctions have adverse effects on Iran, was in a defiant mood last week, when he said on the eve of the resumption of nuclear talks with the west, that Iran had sufficient funds to withstand a total embargo on its oil sales for two to three years. But even if Iran actually possesses these funds, it would face serious problems in moving them around to finance trade under existing international sanctions. Also if some small banks or institutions are still willing to facilitate Iran’s global business, they would certainly be charging high fees to do that.  

Copyright MEES 2012.