Hyperinflation arrives with the end of price subsidies in Iran
Posted on 23 December 2010 with 2 comments from readers
The street-price of bread is reported to have doubled in Tehran this week as price subsidies were removed from energy and food. Taxi prices jumped 40 per cent in reaction to a 900 per cent hike in diesel prices. Electricity and water prices jumped 300 per cent and household cooking gas by 500 per cent.
Officials said that food and energy subsidies have been costing Iran $100 billion a year and can no longer be afforded. They cited recommendations from the IMF suggesting the subsidies should be removed.
Hyperinflation
To help the poor handle these price increases the government is paying cash payments of $80 per month to those on the lowest incomes. Welcome to hyperinflation in Iran which is coming both from rising costs and rising income.
The government has proclaimed nothing short of an ‘economic revolution’. This appears to be like perestroika, the price liberalising economic reforms of the dying days of the Soviet Union. It resulted in empty shops as people bought anything to use up a devaluing currency, four-hour queues to buy bread, and of course a black market for everything.
Why has this been implemented as an ‘economic revolution’ rather than phased over time to allow people to adjust to the changes more gradually? It is not clear but the precedents for suddenly raising the cost of staples like bread in any country are not good.
Soviet example
In the case of the USSR the writing was on the wall from perestrioka and glastnost. Over on the other side of the Persian Gulf the Arabian Oil States can only watch and observe. But the immediate impact on trade flows, already badly crimped by international sanctions this year, cannot be good. Those who cannot afford bread do not buy other products.
Eventually the USSR broke up and after a decade of internal chaos Russia emerged as a new energy and commodities giant with a stable economy and the government in charge. There was good business to be had at various stages in this process, and those who stuck with it have profited enormously.
Likewise Iran will one day sort out its economic problems to the benefit of the wider region. Whether that starts with the hyperinflation of this week’s ‘economic revolution’ is less certain.
2 Comments posted by readers:
Hyperinflation will hit many economies very soon including Western countries. In Iranyou are right about sanctions being part of it, though Iran has been a victom of certain countries trying to bring the government down & to surprise of many they are much stronger than many anticipate . The leadership, being practical, honest & free from corruption has proven hemselves to be popular among people. Thats why foregin sponsored green movement failed & country will go through these crisis without any major problems. Minor rioting etc are common place everywhere but they have Iron grip.
Wow, I didn’t know the Iranian Guard read Arabian Money! On topic though, its certainly interesting, but I have to wonder if this is really economic liberalization. It could just as well be a shift in government assets.