Document Type : Research Paper

Authors

• Hossein Tavakolian ¹
• Reza Taleblou ¹
• Shaghayegh Abbasali ²

¹ Associate Professor, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran

² M.A. Student of Economics, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran

Abstract

Despite efforts to improve the governmental budget system in Iran’s current economic situation, no significant progress has been made. The relationship between the key stakeholders—namely the government, parliament, regulatory bodies, and the general public as the ultimate beneficiaries of the budget—is not properly regulated. As a result, there is decreased transparency and accountability among various government officials. Using the Generalized Method of Moments (GMM) for the period 1993–2018, the current study aimed to examine the government off-budget operations and their impact on inflation, with a focus on fiscal dominance via the banking system. The findings suggested that increased fiscal dominance via the banking system’s debt channel had a positive effect on inflation, thereby confirming the presence of fiscal dominance. The results also highlighted a negative relationship between political stability and corruption, on the one hand, and inflation, on the other. These variables remained at low levels throughout the analyzed period, indicating a need for greater attention from the government and political factions across the country.

Introduction

The inflation rate in Iran is a major concern that contributes to rising levels of poverty, inequality, economic instability, and reduced private sector investment. This persists despite the fact that many other countries have successfully managed similar issues. Unfortunately, monetary authorities in Iran have struggled to tackle this pressing problem. The Iranian economy has long struggled with the persistent issue of high inflation, which is largely attributed to fiscal dominance over the Central Bank. Moroever, addressing the budget deficit is partially achieved through off-budget operations facilitated by the banking system. Covering the period 1993–2018, this study examined the government off-budget operations and their impact on inflation, with a focus on fiscal dominance within the banking system. It actually dealt with the Central Bank’s inability to control inflation, highlighting fiscal dominance as a key factor. Fiscal dominance arises when fiscal policymakers are not required to balance expenditures with tax revenues, thereby compelling monetary policymakers to address government budget deficits.

Materials and Methods

Applying the Generalized Method of Moments (GMM) to the period 1993–2018 in Iran, the present research examined the government off-budget operations and their impact on inflation, with a focus on fiscal dominance in the banking system. The study used the data from the Central Bank, international transparency websites, and Palta to analyze the quantitative effects of government borrowing from the banking system on inflation.

Results and Discussion

The findings revealed a direct relationship between inflation and government financing through the banking system, emphasizing its analytical significance for Iran’s economy. Due to legal restrictions on borrowing directly from the Central Bank, the government turns to state-owned commercial banks for financing, resulting in a form of active fiscal dominance. This approach increases government debt to the banking system, thus affecting various economic sectors and contributing to instability and chronic inflation. The financial practice, known as off-budgeting, is marked by a lack of transparency and inefficiency in government expenditures, further exposing fiscal dominance via the banking system. Additionally, variables of political stability and corruption control play a role, highlighting the need for government attention across different sectors and political factions in the country.
Table 1. GMM Estimation of the Mode )Inflation as the Dependent Variable(




Variables


GMM




Coef.


Std. Err.


z


|P>|z




Political Stability


POLITY


-0.000272


6.14E-5


-4.433693


0.0000




 Corruption control


GC


-0.000378


2.10E-5


-18.00533


0.0000




Exchange rate growth


GER


0.070614


0.023222


3.040763


0.0034




Interest rate


IR(-1)


-0.045950


0.008164


-5.628554


0.0000




Money base growth rate


GM2(-1)


0.384844


0.035885


10.72431


0.0000




Government debt growth rate to private banks


GGBPB(-1)


0.007662


0.000382


20.06188


0.0000




Government debt growth rate to state-owned banks


GGBGB


0.028705


0.001966


14.59979


0.0000




Government debt growth rate to privatized banks


GGBSPB(-2)


0.006459


0.000110


58.49907


0.0000




Growth rate of government oil revenues


OILP


-0.136378


0.018692


-7.296217


0.0000




R²= 0.614559  
J-statistic=17.89458
 Prob (J-statistic)=0.985014
Instrument rank=43




This study explored the off-budget operations of the Iranian government and their impact on inflation, with a particular focus on fiscal dominance through the banking system. Despite efforts to reform the government budget system, the lack of proper regulation in the interactions between budget stakeholders—including the government, parliament, regulatory bodies, and the general public—has led to reduced transparency and accountability among government officials. The research showed that increasing fiscal dominance through the banking system’s debt channel had a positive effect on inflation, thereby confirming the presence of fiscal dominance. Furthermore, the study underscored the negative correlation between political stability and corruption control, on the one hand, and inflation, on the other. This highlights the need for government attention across various sectors and political factions within the country. In sum, the Iranian economy faces a persistent challenge of high inflation, primarily driven by fiscal dominance over the Central Bank. The study highlighted the government’s dependence on off-budget operations, especially through the banking system, to address budget deficits. This financial strategy is marked by a lack of transparency and efficiency, resulting in economic instability and chronic inflation. The findings emphasized the urgent need for the government to review and reform regulations, reduce structural budget deficits, and improve transparency to effectively control inflation. The low levels of political stability and corruption control throughout the analyzed period underscored the current government’s challenges, stressing the need for comprehensive reforms and action across all sectors and political factions in the country.

Keywords

• Budget Deficit
• Fiscal Dominance
• Off-Budget Operations
• Monetary Base

Main Subjects

• Political economy