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Iran Regime’s New Budget Will Exacerbate Inflation

Iran Regime’s New Budget Will Exacerbate Inflation

In his proposed budget for the upcoming Iranian calendar year, the Iranian regime’s president, Hassan Rouhani, has used the exchange rate of 42,000 rials per U.S. dollar for calculating the income from imports of essential products and medicines. According to the government’s spokesperson, around $10 billion of presumed oil revenue is allocated to these imports.

This is while the regime’s oil revenue will continue to decline due to the United States sanctions on the regime’s oil industry.

In addition, given the likely decline in tax revenues due to the economic recession and the supposed 15% increase in public employees’ salaries, the budget deficit is likely to be very large and perhaps unprecedented during the next year.

The government, therefore, is in dire need of oil revenues. The regime’s economists have repeatedly emphasized the ineffectiveness of government currency policy in controlling the inflation rate of essential products and medicines. Given these two points, the government’s decision to use the exchange rate of 42,000 rials per dollar and allocating its nearly total oil revenue to this policy raises this question that how the regime could easily make such a dangerous decision?

The Iranian regime has decided to use the exchange rate of 42000 rials per dollar as the basis of the country’s import and export. Meanwhile, the exchange rate at the free market is around 140,000 rials per U.S. dollar. So, given its difficulties in selling oil, the regime will face a serious shortage in its budget, and it must either use the Central Bank’s resources or print banknotes to fill this economic gap. This economic policy will ultimately result in a much higher inflation rate.

To understand this issue better, it is necessary to examine the foreign exchange and rial-dollar relationship between the government/Central Bank and the importers of essential products next year. If the government transfers dollars from the sale of oil to the Central Bank at the free market rate and the Central Bank transfers money to the importers at the government rate of 42000 rials, the answer is clear. The implication of this plan would result in both the importer acquiring the 42000 rial exchange rate and the government selling its currency at the free market rate.  In other words, given the high inflation rate, it’s the Iranian people who must pay for this economic policy.

What is the role of the Central Bank in this tragedy? The Central Bank would be forced to secure monetary base expansion and start printing unsecured banknotes and would have to wait for inflationary effects soon. If true, then the secret of the regime’s currency decision would become apparent. The Iranian regime has never ignored the oil revenue and has made a profit on it without mentioning it in the budget.  The only point is that instead of receiving the $9.8 billion from the importer, it comes from the Central Bank. These techniques and calculations of Rouhani’s government are to satisfy the government, their business supporters, and their political representatives, even at the expense of rising inflation and liquidity, which in the subsequent period of the country’s economic process, would lead to more money and currency swings. They would inevitably lead to further inflation.