Tracing the Roots of the Economic Cancer: Why Inflation in Iran is Uncontainable – Part Two
Tracing the Roots of the Economic Cancer: Why Inflation in Iran is Uncontainable. According to Iran Gate, economists have always considered the main cause of inflation to be the heavy budget deficit of the government. This deficit ultimately leads to the government borrowing from the central bank’s resources, thereby expanding liquidity. However, it is important to understand where and why this deficit originates. A significant and noteworthy portion of government expenses is due to the pressure exerted by stakeholders in various sectors, pressure that we commonly refer to as rent distribution.
In the first part of the investigation into the main problems of Iran’s economy, two major factors that prevent inflation control were addressed. These two factors indicate the presence of large and powerful stakeholders in Iran’s economic landscape, making it practically impossible to control inflation. In this part, two other important factors are discussed: bank loan rent and land and housing rent, which effectively eliminate the possibility of controlling inflation.
Bank Loans in the Name of the People, in the Interest of Rent-seekers
First and foremost, it should be noted that the bank interest rate has been negative for almost the entire past 50 years, except for brief periods during the seventh, eighth, and eleventh governments. This means that when the current inflation rate exceeds 50%, the interest rate on loans is set at 18%. This means that anyone who can access bank resources is effortlessly moving at least 32% ahead of inflation.
If you’ve visited the country’s banks, you’ll notice the extremely difficult conditions for obtaining loans. Ordinary people must overcome numerous hurdles to potentially receive limited and small bank loans at interest rates significantly higher than the approved rates.
However, the publication of the list of bank debtors revealed that astronomical loans were granted to stakeholders who not only failed to comply with the approved conditions but also refused to repay the principal amount. In other words, they neither provided collateral equivalent to the loan amount to the bank nor paid the installments.
In such circumstances, the thirteenth government opens the doors to borrowers, but ordinary people face closed doors when they apply for loans at branches. It should be noted that these non-repayable loans ultimately disrupt the balance sheets of banks, and the central bank is forced to inject resources into the banking network to restore balance. This action accelerates liquidity growth, expands the monetary base, and ultimately causes an inflation surge.
In other words, when stakeholders receive large loans from banks and do not repay them, the central bank is forced to fill the gap of the non-repayable money from the pockets of ordinary people through intensified inflation. This results in the national currency constantly losing value, and no one can withstand this devastating flood.
Of course, it should not be forgotten that sometimes governments themselves are prominently among the major bank debtors, meaning that to cover their budget deficit, the government, instead of directly borrowing from the central bank, takes a roundabout approach and borrows from banks without repaying it. This is done to mask the statistics of government borrowing from the central bank, in which the thirteenth government has proven to surpass its predecessors.
Auctioning Off Land
If we look at the financial statements of most practically loss-making listed companies, we will notice their surprisingly and unexpectedly high profits. The reason for this is the benefit these primarily quasi-governmental companies derive from land rent in Iran.
For example, an individual, relying on connections, has managed to acquire a piece of land in an industrial park and supposedly starts a production activity there. This is just the surface of the story because that production activity is fundamentally loss-making, and our story’s stakeholder has managed to store a large capital beneath the feet of the unfortunate workers of that so-called production unit by taking advantage of land rent.
Recently, the thirteenth government, with its four million housing plan, has forced many government institutions to provide land to some quasi-governmental and so-called private companies, which essentially means selling state assets at a price cheaper than free.
This phenomenon peaked during the implementation of the Mehr Housing Plan in the ninth and tenth governments. Many players, who did not even have a day’s experience in housing construction, registered contracting companies and received residential lands from the government at negligible prices. These companies immediately sold the land to construction companies at the real market price, securing substantial profits for themselves.
The Ebrahim Raisi government has once again paved the way for such rent-seekers to operate. A government that came to power with the slogan of fighting corruption and improving the livelihoods of the people, but its actions are precisely in the direction of shrinking the people’s livelihood and leaving the hands of stakeholders more open than ever in Iran’s economic landscape.
The series of articles on tracing the roots of Iran’s economic cancer has been exclusively authored for Iran Gate. Other sections are available through the links below.
- Tracing the Roots of the Economic Cancer: Why Inflation in Iran is Uncontainable – Part One
- You were reading Part Two of Tracing the Roots of the Economic Cancer: Why Inflation in Iran is Uncontainable
- Tracing the Roots of the Economic Cancer: Why Inflation in Iran is Uncontainable – Part Three
- Tracing the Roots of the Economic Cancer: Why Inflation in Iran is Uncontainable – Part Four