Inflation and its impact on exports and imports
With the increase of inflation in the country and public dissatisfaction with it in recent years, various and sometimes contradictory analyzes have been presented about the source of inflation and its reasons. The comments made on the external source of inflation, which was accompanied by the emphasis and support of government officials, were among these analyzes, which, following the presentation of the Central Bank’s report on inflation, were widely reflected in the country.
In this report, using the econometric method, the share of imported inflation in the country’s domestic inflation is 20%.
It should be noted that one of the basic principles of econometrics is that the results of the models and statistics presented can be examined according to statistical levels, number of explanatory variables and modeling methods, and by changing statistical levels and increasing and decreasing variables An explanation of the different figures is obtained.
The purpose of this discussion is not to prove or disprove the accuracy of the declared number, but to try to identify the imported inflation and to state the factors that are effective in creating it.
In general, there are many debates among economic thinkers about the causes and origins of inflation, meaning the rapid rise in prices, which can be expressed in the form of various theories. According to these theories, one of the factors causing domestic inflation is imported inflation. Import inflation means the transfer of global inflation to the economy of any country.
This type of inflation occurs when the prices of some goods, which are the basic and determining goods in the production or consumption of people globally, increase due to some natural factors or politico-economic decisions.
This increase leads to an increase in the cost of production (if the raw materials are manufactured) or an increase in the price of consumer goods. Petroleum, raw materials, food and consequently, the prices of final goods such as petrochemicals, paints, steel, automobiles and a wide range of goods will increase.
Ways of transmitting imported inflation
In general, imported inflation may affect the domestic economy in two ways.
A) Inflation imported through foreign trade
Foreign trade consists of two components: import and export. Imports, depending on the type of goods, directly and indirectly affect domestic inflation. When the price of imported final products (imported manufactured goods) increases, this price increase appears directly at the general price level (consumer price index).
Indirectly considers a situation in which first an increase in the price of imported raw materials and semi-finished products (intermediate goods) leads to an increase in production costs and then this price increase is transmitted to consumers. The third case is through exports.
When the demand for export goods increases due to rising prices abroad. This will lead to a possible reduction in the supply of these goods in the country and will increase prices.
Iran’s economy is no exception, and the second case, the increase in the cost of raw materials and capital, increases the cost of production and the resulting inflation is ultimately imposed on society. The long continuation of alternative import policies in the economic history of the country has had a great impact on the composition of imports over time, resulting in a strong dependence on imports of raw materials, intermediates and capital goods.
The possibility of limited substitution between domestic and foreign raw materials is one of the important features of Iran’s economy. According to the statistics provided, of the total imported goods, about 67.9% are intermediate, 17.7% are capital and 14.5% are consumer.
Therefore, the increase in the price of imported goods initially affects the producer price index, which due to the quasi-monopoly industrial and commercial structure, suppliers are able to transfer this increase in the price of imported intermediate materials directly to the price of final goods.
B) Import inflation due to deficit or excess of balance of payments
An imbalance in the balance of foreign payments may set the stage for inflation. If the balance of foreign payments is in deficit, the value of the national currency will fall, followed by an increase in the price of imported goods.
On the one hand, this causes domestic inflation, and on the other hand, with the devaluation of the national currency, domestically produced goods become cheaper for foreigners, and thus, the country’s exports will increase.
As a result, it will be possible to reduce supply and increase the price of goods in the domestic market. Now, if the balance of foreign payments goes into surplus, new incomes are injected into society, which due to the high ultimate desire to consume and low ultimate desire to save, people’s receipts in the form of additional purchasing power appear in the market and Rising prices are leading.
The balance of payments in Iran has been positive due to oil revenues in recent years. In other words, the inflow and outflow of currency has been more than the outflow of this variable. This has led to more demand for imported goods and services and, ultimately, increased prices in the economy.
Factors affecting the price index of imported goods
As mentioned, the price index of imported goods may have an impact on domestic inflation. But the index itself is affected by factors such as exchange rates, inflation in trading countries and customs tariffs.
The exchange rate is a strong link between national and global economies; A loop whose quantity and quality directly and indirectly affect the domestic prices of commercial goods, and the supply and demand of most goods and services, and affect the performance of the national economy.
The value of the national currency relative to foreign exchange or the exchange rate is a mirror image of each country’s economy versus other countries in the international economic environment. Abnormal fluctuations in the currency system is one of the economic problems of any country that challenges economic stability.
Loss of public confidence in money and a relative reduction in purchasing power compared to international balances are also effects of this. In countries such as Iran, where the bulk of government revenue comes from foreign exchange earnings, when revenues from oil exports or the exchange rate increase significantly, it directly affects the government’s financial position, revenues, and expenditures, and the exchange rate Currency also changes from the point of sale of these products, affecting the budget deficit or surplus.
Some experts believe that an increase in the exchange rate will increase the price of imported goods and will have an adverse effect on politically sensitive economic sectors and accelerate the growth of inflation. The general perception is that if the price of foreign currency is kept low, imported goods will be cheaper and, as a result, the general level of prices will not increase at least.
In such a situation, a thumb account shows that if the dollar exchange rate is low in rials, naturally, imported goods in rials will be cheaper for the domestic consumer. It has been argued many times that if we set the dollar exchange rate at a low level, not only imported goods, but also domestically produced goods that are directly or indirectly affected by imports are less expensive and therefore cheaper. Wet ends.
This view is very common and it is quickly concluded that in order to control the level of domestic prices, the dollar exchange rate should be kept low. For example, when the rate of each dollar decreases from 8000 Rials to 6000 Rials, for a commodity whose price in the international market is 2 dollars, to enter this country in the first case, 16000 Rials must be paid, and after reducing the dollar rate, 12000 Rials must be paid. .
Therefore, if the exchange rate of the dollar decreases to Rials, the cost of imported goods will decrease and, consequently, consumers will face lower prices in the market.
It should be noted that keeping the exchange rate low, regardless of the situation in the domestic economy and without coordination with monetary policy, reduces the competitiveness of domestic producers.
Decreased competition leads to increased imports and its dependence on imports. This issue has been plaguing the country’s economy for many years. The combination of imported goods also shows this. The economy of a country where more than 85% of its imports are capital and intermediate goods and the price of these goods is determined by the exchange rate, which has nothing to do with domestic and international inflation, prevents investment in the production of intermediate goods. And capital is made by domestic producers. Therefore, such dependence is not only not in the interest of the country, but also fluctuates sharply with the slightest international tension in the domestic economy.
Inflation of trading countries
The price index of goods of exporting countries is also effective in inflation. When inflation increases in the trading countries, the price of traded goods will also be affected by this price increase. Iran’s largest trading partners in terms of import value in 2007 were the United Arab Emirates, Germany and China, which accounted for 23.64, 10.9, and 8.84 percent of the total value of Iran’s total imports, respectively.
During 2007, these countries experienced inflation rates of 11, 2.2 and 6.6 percent. According to the figures, the United Arab Emirates is the number one trading partner of Iran in terms of both inflation and import value. With such inflation and a high share of exports to Iran, the UAE will certainly play a greater role in bringing inflation to Iran than other countries. In this regard, the government’s trade policies should be adjusted so that countries with lower inflation rates are Iran’s trade partners.
The customs tariff, which is imposed to support domestic production and prevent the excessive entry of imports into the country’s economy, consists of two parts: “commercial profit” and “basic rights”.
The basic salary is determined based on the decisions of the members of the Islamic Consultative Assembly and currently, for all goods, it is 4% of the value of imported goods, but commercial profit according to the opinions of the Commission Article (1) of the Export and Import Regulation, which is under the Cabinet. , Is variable and its average in 2007 was 26.17% for imported goods. In other words, 26.17% of the value of imported goods is taken from the trader to enter the country.
The higher the customs tariffs, the higher the customs duties (taxes) and, consequently, the higher the price of imported goods for the consumer. Now, in a situation where the price of imported goods has increased, can not the consequences of the price increase be controlled to some extent by changing the commercial profit and reducing it?
Reductions in customs tariffs in a situation where the economy has double-digit inflation, both in terms of economic logic and due to the psychological state, may be effective as a tool to reduce prices.
Although the effect of rising prices of imported goods on inflation can not be denied, but its impact can be controlled with the right policy. Policies that can be adopted in the short term and to some extent overcome the effects of rising prices include the following:
Changes and reductions in customs tariffs should be considered. This can be examined in two ways. First, the price of imported goods for consumers decreases and the upward trend in the general level of prices stops. Second, to prepare for the economic situation in Iran and to create a competitive environment for joining the World Trade Organization, the necessary preparations are made.
At present, change in the countries of the exchange is necessary. In this regard, trade relations should be established with countries that have the lowest inflation rates. Also, in order to be safe from further inflation, it is necessary to expand the level of trade with countries that are members of economic organizations, including ECO and the D8 group.
The purpose of establishing such organizations was to develop regional markets and reduce international tensions. There needs to be more trade policy around the trade unions of which Iran is a member.
In the long run, the economic policies of the government must be adopted in a coordinated and complementary manner. What has been done so far indicates a kind of non-convergence in the economic behavior of the government. Monetary and fiscal policies are adopted without regard to currency and trade issues.
For example, although the country has experienced high inflation rates, the exchange rate as one of the important economic variables has not changed much and has been relatively stable.
Continuation of such a situation will face the country’s economy with serious problems, including the country’s greater dependence on the global economy and, consequently, vulnerability to international fluctuations.