The Rouhani administration also seeks to inject money supply estimated at 75 trillion rials ($2.5 billion) into development projects to stimulate growth. Critics are now warning that these decisions will reverse efforts to lower inflation to the 14% target by March 2016. In fact, the expanded money supply and other efforts aimed at encouraging the private sector to borrow for projects are likely too little to stimulate the economy — but large enough to ignite inflation expectations.
Indeed, the credit set to be released by banks into the Iranian economy “doesn’t address the fundamental factors that have depressed the economy,” argues Mehrdad Emadi, an economist at the BetaMatrix consultancy in London.
A new survey conducted by leading economic daily Donya-e Eghtesad shows that a majority of Iranian economists (86.4%) believe an expansionary monetary policy has no or little impact on growth. Most of the 44 surveyed prominent economists say the main reason for the recession is not the fiscal discipline of past years, with only a minority backing the idea that stimulation of demand will be an effective way to boost growth.
Despite the criticism, administration officials are confident that they will be able to minimize the inflationary impact of their new policies. Minister of Economic Affairs and Finance Ali Tayebnia has said the government is trying to pay part of its huge debt to banks through a debt market, in an attempt to avoid a rise in inflation.
This could indeed be the only positive point of the new stimulus package, as government debt can be sold as participatory, sukuk and treasury bonds — all of which are tradable in a secondary market. According to Tayebnia, the aim of the debt market is to liquidate the assets of creditors, paving the way for the central bank to adopt an open market policy. “Our aim is to organize the government debt in a bid to resolve financial straits and achieve the growth targets,” he argues.