Inflation! Please be careful exiting from recession
In government plans to combat recession the “red line” is inflation surge. As a result in addition to all the plans(۱۷۷ articles) and “Musts” there is one major “Must - not” which is “quantitative easing to stimulate the demand side of the economy”, although since the Great Depression expansionary monetary policies have been an effective solution to the issue of recession. In late ۹۰s financial crisis, Federal Reserve implemented quantitative easing(QE) and increased the money supply which contributed to bottoming - out of the recession.
In government plans to combat recession the "red line" is inflation surge. As a result in addition to all the plans (177 articles) and "Musts" there is one major "Must-not" which is "quantitative easing to stimulate the demand side of the economy", although since the Great Depression expansionary monetary policies have been an effective solution to the issue of recession. In late 90s financial crisis, Federal Reserve implemented quantitative easing (QE) and increased the money supply which contributed to bottoming-out of the recession.
What is the reason for not employing this conventional monetary policy (i.e. QE) by Iran's government? "The nature of recession in our economy is distinctive". President Rouhani's economic team believes that the recession in Iran's economy, unlike many global recessions which are often the result of negative demand-side shocks, is a result of "supply-side" shock.
Two entirely different solutions
According to the government's economic stimulus package; stimulating the demand-side results in "rising prices" and "inflation" and the supply-side is now a high priority. The point is that in our current economic situation the supply-side recession has gradually created demand-side recession due to the decline in "purchasing power". This has been clearly stated in government's report. As a result in order to exit from recession both supply-side and demand-side policies need to be adopted. Quantitative easing is not an effective solution to stimulate the demand-side. The administration believes that "non-oil exports" diversification and those sectors of the economy which act as "catalysts" are of crucial importance to create increase in demand.
Two entirely different solutions to stimulate the demand-side in the package are as follows. First, "Central Bank backed loans" to stimulate supply in the short-term. This would result in deepening recession and inflation. The second solution is to increase "export demand" (demand for Iranian products in global markets) and, at the same time, stimulating sectors such as real estate which act as catalysts. The result would be a gradual non-inflationary exit from recession. Exports not only create demand but also help manufacturers to surmount liquidity issues.
The government predicts that the exit would be "gradual" and a boom in 1393 (2014) is not expected nevertheless improvements are tangible and the objective of economic growth and rise in GDP will be accomplished in the long-term.
Macroeconomic policies on stag-exit
The government introduced its adopted macroeconomic "monetary and currency" and "fiscal" policies in the package. Regarding monetary policies government announced that it has no intention of adopting contractionary monetary policy, yet tends to increase the "money multiplier" and to inject high-powered money into the banking system, unlike the previous administration not by expanding the "monetary base". To sum up "monetary discipline" and matching the "money supply" in order to stabilize the economy and control the inflation rate are the main monetary policies adopted by the government. The key points are: "replacing foreign assets with government debts in the balance sheet of Central Bank of Iran", "adjustment of the nominal interest rate to the expected inflation rate" managing foreign-exchange reserves and monetary base".
On currency policies the government pursues three objectives in this year: "decline in exchange rate fluctuations", "adjusting the exchange rate for the effects of inflation" to improve domestic production and competitiveness and "establishment of single-tier exchange rate regime by the end of 1394 (2015)". This explains an article in the package regarding "narrowing the gap between the official and open market exchange rates".
Fiscal policies: "taxation", "budget" and "government debts".
On one hand, the government plans to "increase its tax revenue to combat budget deficit and decrease the level of dependence on oil". On the other hand, it has been announced that more pressure on manufactures is not logical in the current economic downturn. As a result "tax base" must be increased rather than the number of tax payers. "Government budget balance" is considered as a crucial factor in both tax and fiscal policies.
Surprisingly it has been stated in "government debt management and clearing" chapter of the package that no authority has ever been responsible for dealing with government debts in Islamic Republic of Iran. Proposed solutions are "acquisition of financial assets and clearing debts, stock offerings (state- owned companies), bartering and lastly issuing bonds and Sukuk (Islamic bonds)".