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EghtesadOnline: In an analytical report appraising measures taken to curb inflation, the Majlis Research Center says the government has resorted largely to temporary and micro measures to curb inflation and control liquidity but in doing so has failed to address macro variables.

Matching government measures against proposals made earlier by the MRC, the think tank said “although inflation has been tamed in recent months, the government had enforced only a fraction of the proposed measures.” 

The package put forward by the influential parliamentary think tank pivoted around three main axes: controlling liquidity, halting creation of new liquidity and curbing the colossal volume of liquidity. 

Controlling liquidity involved moves like monitoring banks’ transactions, fighting market speculators and encouraging investors to put their money in long-term investment accounts, according to Financial Tribune.

As for measures to stop the emergence of new and harmful liquidity, the MRC proposed imposing limits on balance sheets of troubled banks, preventing lenders from granting big loans, forcing lenders and their affiliates to end in speculative activities in currency and gold market and cutting interest rates on short-term bank accounts. 

Regarding ways to reduce the volume of liquidity, the MRC has advised lenders to sell their surplus assets and the big debtors to barter their (unpaid) debts with their deposits in banks. 

In the three categories, MRC says the government has only partially put into action proposals under the banner of “controlling the current liquidity “and substantially ignored other measures that seem to have a more influential and enduring effect on inflation rates.

Likewise, the government has successfully embraced the MRC’s plan to fight speculative activities. Actually, the recent decline in inflation is thanks largely to the Central Bank of Iran measures to stabilize the currency and gold market. 


Timely Moves

According to the MRC, the CBI successfully managed to regulate the gold and currency markets by tightening rules for repatriation of non-oil export earnings, managing inflationary expectations and timely intervention in the fragile forex market. 

The government and its oversight bodies, however, failed to effectively monitor bank transactions and encourage customers to keep their money in long- term accounts. In addition, nothing was done to levy tax on capital gains and income tax. 

It appears that the government has taken the easiest and shortest route to fight inflation. Currency rate fluctuations are closely related to short-term inflation and its effects outweigh the above-mentioned measures. 

As such, the government move to stabilize the currency market and prop up the national currency helped contain inflation, albeit in the short term. 

Consumer prices registered a year-on-year increase of 41.1% in the last calendar month ending Nov. 22 compared to the similar month last year, according to the Statistical Center of Iran. This indicates that the inflation growth has lost pace compared to previous months, thanks mainly to a stronger rial. The figure went as high as 52% in April.  


More Visible 

As for measures taken to avoid creating new liquidity, the CBI move to scrap overnight interest rates was the most noticeable action while the regulator did little regarding other proposals, i.e. imposing restrictions on the balance sheet of unhealthy banks or curtailing big loans. In addition, CBI efforts to reorder the lethargic banking sector have been insignificant.

According the think tank, the government did little regarding the third category of MRC’s proposal package, i.e. curbing liquidity growth.  

Not only did the CBI fail to oblige bank debtors swap their debts with deposits, but the Majlis ratified a bill based on which lenders were obliged not to invoke compound interest rate on loans.  Also lenders have so far been able to sell a fraction of their surplus assets. 

All in all, the MRC concludes that in fighting inflation the government has preferred a different approach compared to the MRC. Rather than approaching the subject from the perspective of macroeconomic variables, it has been engaging in a “market regulatory approach”.   

Although the government measures have delivered partially, but the efficiency of such moves in the long term is open to question.  

The approach is flawed as it gives rise to smuggling and strains supervision over prices due to the large number and diversity of retail outlets.  

While it is necessary for the government to fight hoarders and price gougers, the MRC says the efficiency of such measures would at best be limited if not underpinned with solutions to identify and remove the root causes of inflation. 

The powerful think tank again recommended the government to steer clear of creating new liquidity for plugging the recurrent deficit holes. 

“If governments want to compensate the budget deficit by borrowing from the central bank, the monetary base will increase and prices would move up north again.” 


Iran majlis Inflation Liquidity research center MRC government Parliament Curb Piecemeal Measures Tackle Inflation Tackle