Abolishing subsidies to aggravate inflation in Iran

Photo: Abolishing subsidies to aggravate inflation in Iran / Finance

Azerbaijan, Baku, April 7 / Trend T. Konyayeva /

Despite the Iranian government's attempts, the decision to get rid ofsubsidies will significantly impact inflation in the near future, Professor at Northeastern University Kamran Dadkhah said.

"An aggravating factor will be the removal of subsidies in the coming months," he wrote Trend in an e-mail. "The government has taken many steps to minimize or delay the effect of removing indirect subsidieson prices. Nevertheless, the removal of the subsidies will have aneffect over the next year and accelerate the inflation rate."

The Iranian Central Bank announced this week that the inflation ratefor the Iranian calendar year hit 12.4 percent.

In January, Iranian Central Bank head Mahmoud Bahmani announced plans to reduce inflation to 4 percent.

The cause of inflation in Iran, and indeed anywhere in the world, is the growth of liquidity, the expert said.

"The Bank Markazi data for the past years and early 1389 (2010) show that liquidity has been increasing at rates exceeding 20 percent," Dadkhah said. "Given the very slow growth (or perhaps decline) of the Iranian economy during 1389 (2010), it is not surprising that inflation is double digit and accelerating."

Now, inflation is the main economic problem in Iran and caused the Iranian rial a to drop significantly in value over the past few years.

Some economists think that high inflation rate in Iran is due to President Mahmoud Ahmadinejad's wrong economic policy. He lends small and medium businesses enormous finances at low interest rates, subsidizes thepeople, and greatly invests public funds in the industrial sector.

According to experts, oil export revenues are also distributed improperly.

In December 2010, the government announced reduced state subsidies for the population. This resulted in a fourfold increase in petrolprices and cuts in bread benefits.

In late March, the conservative member of the Iranian parliament Ahmad Tavakoli claimed that the Iranian government obliged the local producers to keep prices down by any means under threat of imprisonment to alleviate the concequences after cutting the government subsidies.

According to Dadkhah, many believe that even indicated figures underestimate the extent of inflationary pressure in the Iranian economy.

To restrain or to reduce inflation, in the short run the Iranian government needs to control the increase in money supply by curbing its expenditures, the expert believes.

"It should also make a distinction between its budget in the domestic currency and its revenues from oil and its expenditures that are in the dollar," he told.

While in the long run, Iran has to promote production by engaging in true, as opposed to nominal, privatization and by removing obstacles in theway of private sector investment, Dadkhah said.

Furthermore, Iran has to come to terms with the United States, the West, and indeed the world, and it has to engage in negotiations to remove economic sanctions, he reiterated.

"Sanctions, although ineffective in changing Iran's political behavior, have been detrimental to its economic well being," Dadkhah told. "We can forecast that if Iran does not drastically change its economic policies, the inflation rate will accelerate."

The U.S. and other Western countries accuse Iran of developing nuclearweapons under cover of peaceful nuclear energy program. Tehran deniesthe accusation, saying its nuclear program is exclusively peaceful innature.

Resolutions adopted by the UN Security Council, as well as additionalunilateral sanctions approved by the U.S. Congress and the foreignministers of all EU countries, were primarily directed against thebanking, financial and energy sectors of Iran.

Restrictions imposed by the EU include the ban on the sale ofequipment, technologies and services to Iran's energy sector; the samemeasure refers to the refining industry. New investments in Iran'senergy sector have also been also prohibited as a whole. Because of lack of investments due to the sanctions, the production capacity is decreasing, and therefore, Iran cannot effectively increase production and develop this sector which is the main source of income for Iran.

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