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Oct 04, 2012 (LBO) - Iran is heading for hyperinflation with a collapsing Riyal driving up prices above a 50 percent a month threshold, as US led economic sanctions hurt state revenues, a top monetary economist has said.
Steve Hanke, from The Johns Hopkins University in Baltimore estimated that Iran's monthly inflation rate has reached 69.9 percent, based on the latest black market foreign exchange rate.
"With a monthly inflation rate this high (over 50 percent), Iran is undoubtedly experiencing hyperinflation," Hanke wrote in a blog post at Cato@Liberty.org
The Iranian rial officially quoted at around 12,260 to the US dollar by the country's central bank.
Iran's official inflation rate was calculated at 23.5 percent for the month ending August 20, media reports have quoted Parliament Speaker Ali Larijani as saying that the rate was 29 percent.
Like Venezuela, Iran has experienced 20 percent plus inflation even in the past despite being an oil exporter due to weak monetary policy.
Hanke says the black market and official exchange rates began to diverge after July 2010 when President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act against Iran.
"This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the Riyal, over the course of a single weekend (8-10 September 2012)," Hanke writes.
"The free-fall has continued since then."
On October 92, the black-market exchange rate had reached 35,000 Riyals to the US dollar, a 65 percent decline in the currency.
There have been protests in Iran over the sharp fall of the currency.
A country usually heads into hyperinflation when a central bank monetizes large volumes of debt (prints money by purchasing government securities) to maintain state spending when tax revenues fall, especially in times of war to maintain military expenses.
When hyperinflation takes holds for several months accelerating prices push up the costs of running the government even more, unless expenses are cut to reduce the burden of the state on tax paying citizens.
Meanwhile taxes which are paid monthly quarterly or yearly have much less value when they reach the government, a phenomenon known as the Olivera-Tanzi effect.
Declining real taxes, forces even more money printing which results in further currency collapse and more domestic inflation.
People then start to buy up real goods instead of keeping cash to maintain the value of their savings, leading to a loss of confidence in the currency.
Currency reform and freezes in state expenses or dollarization (using a foreign currency or currencies) is needed to stabilize the economy.
Correction - Olivera-Tanzi effect
http://lbo.lk/fullstory.php?nid=848342070
Steve Hanke, from The Johns Hopkins University in Baltimore estimated that Iran's monthly inflation rate has reached 69.9 percent, based on the latest black market foreign exchange rate.
"With a monthly inflation rate this high (over 50 percent), Iran is undoubtedly experiencing hyperinflation," Hanke wrote in a blog post at Cato@Liberty.org
The Iranian rial officially quoted at around 12,260 to the US dollar by the country's central bank.
Iran's official inflation rate was calculated at 23.5 percent for the month ending August 20, media reports have quoted Parliament Speaker Ali Larijani as saying that the rate was 29 percent.
Like Venezuela, Iran has experienced 20 percent plus inflation even in the past despite being an oil exporter due to weak monetary policy.
Hanke says the black market and official exchange rates began to diverge after July 2010 when President Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act against Iran.
"This decline began to accelerate last month, when Iranians witnessed a dramatic 9.65% drop in the value of the Riyal, over the course of a single weekend (8-10 September 2012)," Hanke writes.
"The free-fall has continued since then."
On October 92, the black-market exchange rate had reached 35,000 Riyals to the US dollar, a 65 percent decline in the currency.
There have been protests in Iran over the sharp fall of the currency.
A country usually heads into hyperinflation when a central bank monetizes large volumes of debt (prints money by purchasing government securities) to maintain state spending when tax revenues fall, especially in times of war to maintain military expenses.
When hyperinflation takes holds for several months accelerating prices push up the costs of running the government even more, unless expenses are cut to reduce the burden of the state on tax paying citizens.
Meanwhile taxes which are paid monthly quarterly or yearly have much less value when they reach the government, a phenomenon known as the Olivera-Tanzi effect.
Declining real taxes, forces even more money printing which results in further currency collapse and more domestic inflation.
People then start to buy up real goods instead of keeping cash to maintain the value of their savings, leading to a loss of confidence in the currency.
Currency reform and freezes in state expenses or dollarization (using a foreign currency or currencies) is needed to stabilize the economy.
Correction - Olivera-Tanzi effect
http://lbo.lk/fullstory.php?nid=848342070
