Iran’s central bank can help cut the country’s 40 percent inflation rate in half by bringing greater discipline to money markets and ending funding for some housing and other projects, a top bank official said.
Former President Mahmoud Ahmadinejad, having pledged to improve the lives of poor Iranians, asked the central bank to help fund cheap housing projects and make cash payments to citizens after energy and food subsidies were halted in 2010, triggering price rises.
The central bank should “acknowledge that it shouldn’t be present in this area anymore and act,” Farhad Nili, director of the bank’s Monetary and Banking Research Institute, said in an interview in his Tehran office. “It can participate in sessions, but should say don’t count on my finances.”
About half of Iran’s inflation is largely due to the bank’s involvement in the projects, Nili said. At the same time, policy makers need to create a “deep money market,” foment the offering of “long-term instruments” and bring about greater “market discipline,” he said.
“All of this should be done and if we start now it will yield results in one year,” Nili said. “This should help bring inflation below 20 percent.”
Inflation accelerated to 39 percent by the time Ahmadinejad left office in August, driven by his fiscal policies and international sanctions imposed on Iran over its nuclear program. The Iranian government and world powers signed an agreement last month that traded some sanctions relief for Iranian concessions on the nation’s nuclear work.
Central bank Governor Valiollah Seif, appointed after President Hassan Rouhani’s election victory in June, has called for the bank’s independence from the government to be restored, and said controlling liquidity and curbing inflation are top priorities.
Half of the funding for a program to build 2.2 million low-cost suburban housing units came from the central bank, Nili said. While the project won’t be scrapped, the source of funds will change, he said, adding that issuing housing securities is an option.
“In a market where the currency is stable, interest rates are not that attractive, gold is decreasing and inflation is high, people want to hedge against inflation,” Nili said. Housing securities “can be a good candidate.”
The central bank also temporarily assisted Ahmadinejad’s government in making cash handouts to millions of Iranians after decade-long food and energy subsidies were cut as part of a five-year program.
The effects of the cash transfers are still visible in the central bank’s balance sheet, Nili said. The central bank must provide economic indicators regularly, which wasn’t the case under the previous government, and aim to lower inflation within a given period but should not “distribute cash,” Nili said.
The bank “had become a first resort and it should go back to being a last resort,” he said. The institution should only intervene “with conditions, in selective cases and when there is a crisis.”
There are already some positive signs in the economy, which Rouhani has vowed to revive by engaging with the world, securing an end to sanctions and “funneling investment in the right direction.”
Iran’s inflation rate slowed from 40.4 percent in October to 40 percent last month, according to the central bank. Official data recorded a 6 percent contraction in the economy in the Iranian year that ended March 2013, Nili said. The easing of sanctions may help Iran “move beyond recession” and achieve GDP expansion of 1 percent in the fiscal year starting March 21 from a current prediction of no growth, he said.
Inflation was also exacerbated by Iranians’ distrust of the previous government’s ability to counter the effects of sanctions. The national currency lost about half of its value against the dollar in unregulated markets in the past two years.
“It’s for people to accept that the government is credible, predictable, that its actions are rule-based not discretionary, that it sees the long term and isn’t short sighted,” Nili said. “If it does send credible signals and the belief is created, then inflationary expectations will decrease.”
The government is trying to send a signal that it can’t just “fix” the economy and needs the help of Iranians to spur growth, Nili said. The administration’s message is that it will “take obstacles from along your path and give you enough incentives to go forward and pick the fruit from your fruit trees,” he said.
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