Omid Memarian
o.memarian@roozonline.com

In an exclusive interview with Rooz, prominent economist Saeed Leylaz talks of the effect of global inflation on Iran’s economy. Read on for the details.

Rooz (R ): A few day ago the Central Bank (CBI) announced the inflation rate to be a staggering 19.5 percent, which according to the IMF is the highest in the Middle East and the fifth highest in the world. Iranian officials had predicted in March that inflation would stabilize at 15 percent. Why has the rate gone up?
Saeed Leylaz (SL): Global inflation has a very strong impact on the Iranian economy. This effects of global inflation are only now coming to Iran, which was not the case in the past. Despite CBI’s measures to reduce the rate of inflation, what is dominant in this economy is what I call financial anarchism and chaos. The large number of checks that have been issued without any controls are among the examples of this chaos, which despite the CBI’s efforts in recent months to collect, continues to plague the financial and economic sectors of the country.

The other issue is that while monetary and fiscal policies are expected to be in harmony and complimentary, they are not. For the first time in the history of this country, prior to the 1979 revolution and after it, these two policies are contradictory.

We must not forget that the international prices of food have only gone up by about 65 to 70 percent while during the last 3 years, the Iranian economy has shifted from an exporter of food products to a large importer of food. If you walk into any fruit market in Tehran you will see ten non-essential foreign fruits presented for sale. Iran currently has a multi-billion Dollar import bill for foreign autos, fruits, different kinds of meat and other products that are not essential to people. Because of these imports, the inflation that exists in the international markets is passed on to the Iranian economy.

R: What is the impact of the UN sanctions and the refusal of European, Japanese and American companies from dealing with Iran?
MJ: These all impact it. Opening any Letter of Credit to import anything is becoming more difficult and more expensive by the day. The expenses associated with money transfers are now more expensive than before. Also note that the value of the currencies of the countries you have mentioned in relation to the Rial has gone up so much that it is no longer economic for Iran to buy products from them. This is another economic reason that pushes us towards countries like China. The issue is that these Dollars that used be counter-inflationary have now become expensive.

R: It is said that the government has had oil revenues of $200 billion over the last three years. How can this large amount of money help reduce inflation and under what conditions will it have the opposite effect?
MJ: As I speak with you, there are some 100,000 containers that have been waiting for a month to unload their contents in Iranian ports. The transportation, customs, and ports infrastructure cannot handle so much traffic. Therefore a lot of money is paid as demurrage on these imports, which is in addition to the 2 percent per month damage that is charged for them. Our liquidity has similar problems. Until 1997 this country used to import about $12 billion worth of goods but in 2008 I think the imports bill be between $70 and $75 billion, for products and services. This is six to seven times what it used to be.. We do not have the capacity to import so much. And just like in 1977, a sharp rise in imports led to astronomical rates of inflation. The government must be more cautious in the import of these Dollars into the national economy. But whatever it does now, it will only lead to still higher inflation rates.

R: So what is the short term solution to control this inflation?
MJ: There is no short term solution. In fact the problem with Mr. Ahmadinejad’s administration is that it only seeks short term solutions. We must return to proper fiscal policies that were planned and outlined in the fourth development plan. If we do not return to fiscal discipline and reduce the size of the government and do not bring the influx of Dollars under control, we will not accomplish anything. The government must succeed in reducing its budget deficit for which it must reduce its own size and increase its revenues. There is no other way to control inflation. The principal cause of inflation in Iran is the government’s budget deficit.

Mr. Ahmadinejad has created a reversal and detour for the Iranian economy. As I speak with you today, the rate of inflation in the country is four times higher than what it was just 2 years ago. This means the rate has changed from 6.5 percent in March/April of 2006 to 24 percent in March/April of 2008. This reversal in policy was because of its deregulation policies and unleashing the free markets which has struck a heavy blow on the national economy. Our proposal is that the government must return to fiscal discipline and return to the free market and control is expenses, reduce its subsidies and embark on a series of contractionary fiscal policies to control inflation. For the short term, the best way to bring inflation under control is to increase the interest rate.