By Mojde Rezaee & Alireza Hojjatnia
“Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country’s other products less price competitive on the export market”
With a rise in commodity prices, it is expected for oil rich nations to witness economic growth and generally a better economic performance. Unless being managed accordingly by adopting adequate and effective policies, such massive revenues will cause irreparable economic catastrophes which had been covered and hidden before. The economic aftermaths for the nation would be abnormal inflation growth, meteoric rise in real estate prices, reduced manufacturing and high unemployment rate which all end in instability and drop by drop will worn out the economy’s infrastructures.
The early symptoms of the Dutch disease in Iran, erupted again on early 2005 when oil revenues hiked and steered a huge pile of foreign currency into the country. The acting administration chose the cheap imports to rein the price jumps. The late president decided to inject the income directly to households by subsidies, housing schemes and lending more easily. Eventually the plan wound up in a ridiculously and abnormally higher than expected liquidity flow amid nation which caused an aggressive shock to housing market and made different economic sectors highly volatile.
Over the recent years, the effect of these wounds became visible. Rial depreciation made merchants to face more serious problems than ever. The society met an unemployment rate of near 20 percent. Not to mention that worldwide sanctions made the situation even more drastic. That being said, the sole purpose of this article is to determine whether the disease is going to contaminate Iran’s economy again or not.
President Rouhani’s administration managed to curb inflation rate and even reduce into one-digit. The latest figures showing an annual inflation rate of 8.8%, down by 0.1%, and a point to point rate of 9.5% (+0.1%).
Investigations prove that stabilizing the foreign exchange rate has controlled the tradable items prices while liquidity increase and its combination changing have posed the threat of inflation rise among non-tradable sector. It is noteworthy to mention that the recent foreign exchange policy has created an artificial balance in economy to the benefit of import, which was proven to be unstable in the long run over 2006 to 2011.
The Central Bank last statistics show that the price gap (8.2%) between the tradable and non-tradable items has deepened over Aug-Sep period, which is a red alert for the return of “Dutch disease”. The inflation rate for tradable sector rose by 0.2% to stand at 5% while the same rate stamped a 1.2% rise in non-tradable items to reach 13.2%.
Considering the fact that the annual inflation for non-tradable items has never entered the one-digit zone over the past years, it is realized that the sharp drop in tradable sector rate has played the most part in the total fall.
Although the disease penetrates quickly and destroys infrastructures in a matter of years, it will take decades to remedy all the harms. The rivals will capture the export havens eventually while further development of non-oil sector will be an impossible mission in case capital market has been crippled earlier.
Since the oil driven boom will be over in coming years, it would be only logical to come up with supportive policies focusing on manufacturing developments. Indeed, the real cure lies in the hands of invert real appreciation of nation’s money value along with forming the foreign currency fund to deposit the oil revenues, supporting domestic production as well as resorting to diversified import and export destinations. Considering the conducted and to be conducted attempts by Iran and based on the existing evidence, observing the future trend of inflation rate will assure experts whether the disease has returned or not.
- Manouchehrirad, Reza, and Shamsgharneh, Naser. 2013. The Dutch disease in Iran’s economy. Donya-e-eqtesad publications.
- Donya-e-eqtesad website (http://donya-e-eqtesad.com)
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