Is Iran ready to turn blind eye on inflation to beat recession?

Is Iran ready to turn blind eye on inflation to beat recession?

Baku, Azerbaijan, June 22

By Farhad Daneshvar – Trend:

President Hassan Rouhani’s government has done well in tackling the galloping inflation rate in the country, but Iran’s economy still suffers from recession.

When Rouhani took office in 2013 the inflation rate was somewhere above 40 percent and now the government officials say it has dropped to single digits (9.5 percent) for the first time in a quarter century, a landslide victory for Rouhani's administration.

Meanwhile, Iranian bankers have decided to cut the interest rates, agreeing on 10-14 percent in interest rates for short-term deposits and lowering the rates on one-year deposits to 15 percent from the current 18 percent.

This is while a group of experts have suggested that the government’s policies aimed at bringing down the inflation over the past couple of years have forced many firms and companies to decrease their productivity.

In some cases, firms and companies have been unable to pay salaries for several months and a couple of large factories have reportedly been on the verge of bankruptcy.

Keeping money in banking account has been a risk-free option for Iranians as there has been no default risk for account holders in the country, a reason behind peoples’ will to hold their capital in banking accounts rather than investing in parallel markets.

Now, with the new decision to lower banking interest rate people are likely to think of new markets for making their money "work".

Alireza Kadivar, a financial analyst and deputy head of Iran’s Novin Investment Bank, has suggested that boosting construction industry in Iran is among considerable solutions to get the economy out of recession.

“The Iranian government understands that the construction industry is capable of pushing the entire economy forward as there are a high number of sectors linked to construction industry,” Kadivar told Trend.

However, a boom in the construction industry would lead the inflation to go up as the prices of housing units will possibly hike after big investments are attracted to the construction sector.

Kadivar said that Rouhani’s administration may review its policies on bringing inflation under control in order to help the economy pull out of recession.

Meanwhile, Saeed Leylaz, an Iranian economist and a former advisor to President Mohammad Khatami, also told Trend that the government may agree with slightly raising of inflation rate as it would not inflict serious harm to the country’s economy.

In spite of the above mentioned facts, these all depend on how banks will keep committed to the agreement.

Earlier this year, Iranian banks had an agreement to reduce the deposit interest rates but some of them failed to observe the limits and paid more interest rates in order to attract customers.

In the lack of an official directive from the Central Bank on lowering interest rates, some bankers may clinch the deal themselves, Kadivar noted.

On the other hand, if the bankers keep committed to the agreement, it surely will have positive impacts on the country’s economy in the terms of moving capital and assets from bank accounts to various markets, he said.

Coming back to the President Rouhani’s triumph in bringing inflation under control, it appears that turning a blind eye to slight rise in inflation for the sake of helping economy to climb out of recession is among main options for the government to be considered in the near future.

Farhad Daneshvar is Trend Agency's staff journalist, follow him on Twitter: @Farhad_Danesh

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