The Problem is the Same: Economy

Another piece I wrote for IranOpinion.com on the economic challenges ahead and the significance of the economy in the upcoming election:

As Iran’s presidential election approaches an increasing number of analysts and observers comment on the state of Iran’s economy. The last reports indicate that some segments of Iran’s labor force are experiencing high unemployment rate while the economy is experiencing an increasing inflation rate. The next president faces economic challenges some might consider unprecedented.

Last month Statistical Center of Iran (SCI) announced employment data for the last Iranian calendar year from April 2012 to March 2013, reporting the unemployment rate to be at 12.2 percent, which is almost at the same level with the unemployment rate in the preceding 12 months. According to this report, Iranian youth experience higher than average unemployment rate, 28% for males aged 20 to 24 years old. The youth unemployment varies widely across the country and in some provinces it is reported as high as 50%. The SCI puts the number of the unemployed at 2.9 million, 100,000 more than its last annual report. However several websites report the unemployment numbers to be much bigger, referring to discouraged workers’ effect.

One source of discrepancy comes from the definition of employment, which has changed during the current administration and now it includes individuals who work for at least one hour during the week. Many believe that this definition, which is also used by several other countries, underestimate the unemployment in Iran while overestimating the size of employed population. They argue that given the increasing inflation and reports of business closures and the slowdown in manufacturing, it is logical to see an increase in unemployment rate and not a decrease. However in offering an analysis one has to rely on the available data and observations. The increase in the size of unemployment is evident. Although one might argue the unemployment rate has not increased. One thing can thus be said with certainty: more Iranians need jobs.

According to reports by SCI and Central Bank of Iran (CBI) inflation rate has been increasing at a faster pace in the past two years (read here). A recent report by Majlis Research Center (MRC) warns that the economic growth might fall to -4%. In other words Iran’s economy has begun to shrink. When an economic contraction begins, in the presence of inflation, the only logical conclusion is that the volume of economic activities is declining within the society. This means less investment, less business enterprises and eventually less jobs and employment opportunities. The American and European consumers are only too familiar with this phenomenon; many lost their jobs and even their homes following the global financial crisis of 2007-08. It seems as prices are on the rise the ability of Iran’s economy to create jobs is declining.

Increasing unemployment and increasing inflation rate increase the possibility of hyperinflation in Iran’s economy. This increases the uncertainty investors and businesses face daily in marketplace. Under these circumstances any modest drop or price change could alarm consumers and producers prompting them to become irrational in the marketplace. Consumers will try to buy commodities because they expect them to be more expensive later, producers will be reluctant to sell because they do not know how much the same product will cost them in the immediate future. The outcome will be a vicious cycle of inflation which would discourage manufacturing even further. That means slower job creation and even higher unemployment. In order to prevent this, any administration’s first task is to battle the uncertainty while promoting entrepreneurial endeavors.

A large portion of Iran’s population are younger than 35 years, they require jobs and market stability to make individual decisions in pursuit of their happiness. To provide them with such stability government needs to change course. Its first step could be to adopt higher standards in fiscal and monetary responsibility. The second step should be defining a viable economic target. According to MRC the current administration has been slow in addressing its budget deficit, while increasing money supply via banking system and accepting commitments it cannot fulfill.

When Mr. Ahmadinejad came to power 8 years ago he promised a zero unemployment rate by creating 2.5 million jobs in 2-3 years. Last month in a live program Dr. Nili, an Iranian economist, shared some of SCI reports with the viewers which showed the net job creation from 2006 to 2011 to have been an average of 14,200 jobs per year. The government side produced reports backing its claim, but many agree that unemployment in Iran is on the rise. With the current reports on negative economic growth, it seems the government’s means to address this issue are diminishing as well.  However it still can face its challenges by defining a viable economic target. Reducing inflation could be such a target. First it is doable and creates credibility for the government and second it reduces the economic volatility encouraging investment and rational behavior. Iran’s economy can benefit from both significantly.

The question these days is not who will be president, but if anyone could face these challenges and succeed despite sanctions and public mismanagement and structural deficiencies embedded in Iran’s economy?  It seems whoever comes to office needs to know his economics 101 pretty well

Still resilient: people vs. prices

My recent article for IranOpinion.com

As Iranians came back from a long new year holidays they face more volatility in their economy than they expected. Two digits inflation rate has been part of Iran’s economic reality for the past decades, however recently Statistical Center of Iran (SCI) announced that inflation has reached new heights in the last month of last Iranian year (March 2013).

According to the SCI latest report released on April 1st 2013 Consumer Price Index (CPI) has reached 601.4 using 2002-2003 as a base year. This signals an increase of 40.6 percent compared to the same month in the previous year when CPI was 427.6.  Compared with the prior month the CPI has increased by only 3 percent rising from 583.7 to 601.4. The lion share of increase in CPI belongs to increase in the price index for food products; 85.1% of the change is due to the increase in the prices of these items. Overall CPI increased by 31.5% during last Iranian calendar year (March 2012-March 2013), however this ignores the point to point increase of 40.6% and downplays the drastic increase in the price levels.

Citing these differences some argue that the data does not reflect the true inflation rate in Iran. However that argument is valid about many countries. For example Canadian government adjusts CPI estimations from time to time to keep the official value within the targeted area of 3%. Recently USA government has decided to use a different approach to using CPI in estimating the adjustments in the social security payments. The important point about CPI is not how much it is but how one can interpret its changes.

Interpreting variations of CPI many economists will remind you that an increase in CPI reflects a potential decline of shopping power for the average typical household. After all CPI is estimated using an average typical household’s consumption basket. This basket includes the average amounts of items consumed by average families. This is the practical approach to estimating CPI, however by using a fixed weight for different items and using a limited number of items CPI does not necessarily reflect all the changes. Thus it is not a good way to measure what people are actually buying at the store. It does not take into account the simple fact that shoppers might alter the amount of their purchases when the prices are rising. A household’s budget dictates the total cost it can spend, not the amount of items. When prices change a household cope by changing the amount of items they purchase. Here one must look at the numbers more closely.

Inflation: increasing at an increasing rate

The price index to for overall category of food, drink and tobacco products reached 895.6 in the last month with the price index for food items reaching 937. This is an overall increase of 57.4% compared to the same month last year, when one estimates point to point inflation in food products. In other words average typical Iranian family had to spend 57.4% more on average on food items in this Nowruz compared to the previous one. It is only logical to think that many Iranian households had to make adjustments in their consumption baskets by choosing to buy less from some products, food items in this case. Since the total consumption is not known for different items it is difficult to identify where average Iranian households had to compromise. The true welfare effects of this increase in inflation are unknown.

Traditionally SCI and Central Bank of Iran (CBI) report the average change in price indexes and not the point to point changes, which is usually higher than 12 month average.  One also needs to take into account that Iranians experience the sharpest increase in inflation during the Iranian New Year shopping season. Reporting a 12 month average would reduce the seasonality affect. However the fact remains that the inflation has increased across all the months for the last Iranian year. It is noticeable that it increased at an increasing rate during fall of 2012 and winter of 2013.  Some might argue that this pattern is not alarming and it follows the traditional business cycle in Iranian economy. However reviewing SCI report one notices that 12 month average increases in inflation for March 2012 through March 2013 are uniformly higher than the same averages for the period of March 2011 through March 2012.

Facing these changes the question remains that how an average Iranian household will react to increasing prices. One interesting observation is the number of domestic travelers during the Iranian New Year holidays. According to one estimate the number of domestic travelers passed 61 million. That is a significant number in a country of 77 million. Again this aggregate number hides the substitution effects, which might exist. It is true that some Iranians might have chosen domestic travels because traveling abroad has become too expensive following last year devaluation of Rial, Iranian domestic currency. However looking at the number of travelers one can conclude that the average Iranian family can still afford traveling and a three weeks holiday, a not insignificant fact to remember.

Reading SCI report on price indexes one has no doubt that the prices have been rising at a faster pace than before in Iran. Many observers will follow the inflation in Iran closely in coming months. However when placed in the overall context of the economy and when other economic factors are taken into account one has to admit the average typical Iranian household has remained resilient in the face of economic volatility.

Iran Economy and Market Overview – August 2007

The inflation rate for the 12 months to August stood at around 15.4%. Although this figure has dropped in comparison to the previous month, it is 3% higher than the inflation rate recorded for the previous Iranian calendar year (which ended on 20 March). The main reasons behind the rise in the inflation rate since the start of the year are:
1. the government’s budget deficit,
2. excessive withdrawals from the country’s Oil Stabilization Fund,
3. excessive obligatory loans provided by the banks and
4. the interest rate cut that was imposed on the state-owned as well as the privately-owned banks by the government.

Read more here: http://www.payvand.com/news/07/oct/1027.html