Rouhani Shifts Gears on Economy

By Alireza Ramezani, for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

After months of resisting calls for an economic stimulus package, President Hassan Rouhani has finally changed his stance on the matter. This will be the second such short-term plan initiated since he took office in August 2013. The first 18-month plan was aimed at curbing galloping inflation and fighting recession by committing to fiscal discipline.

However, the current plan, which is scheduled to last six months, seems to be a shift away from the administration’s central approach of using a contractionary monetary policy to achieve single-digit inflation by March 2017.

Last month, speculation that the Iranian economy has begun faltering again following four consecutive quarters of growth forced four key ministers to write a letter to the president, warning him of a looming financial crisis in the country. Crippling sanctions have yet to be lifted and a credit crunch has already put overwhelming pressure on banks, on which all industry sectors — and even the government — are reliant for project finance.

Thus, bitter realities on the ground coupled with pressure from conservative media as well as some figures from inside his own administration appear to have finally pushed Rouhani to give up his contractionary monetary policy, which has so far decreased inflation to 15% from more than 40%.

Chronic inflation has been the root cause of economic backwardness in Iran, and the Rouhani administration took office with determination to confront this issue once and for all, despite criticism. However, the new stimulus package is a shift from Rouhani’s original goals, as it envisages a cut in commercial banks’ legal reserve requirements from 13% to 10% — a move that will certainly increase both the money multiplier and the money base.

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