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Monday, 26 November 2012

The duration of Iran´s hyperinflation?


The duration of Iran´s hyperinflation?

Hyperinflation was defined by the International Accounting Standards Board in IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 3 in 1989 as cumulative inflation over three years approaching or exceeding 100 percent; i.e., 26 percent annual inflation for three years in a row.

This is the generally accepted definition of hyperinflation since 1989 followed by millions of accountants and economists in all countries (more than 140) implementing International Financial Reporting Standards. It is also the definition followed by the American Institute of Certified Public Accountant´s Centre for Audit Quality´s International Practices Task Force and the US Securities and Exchange Commission.

Brazil was in very high and hyperinflation during 30 years from 1964 to 1994 according to the Central Bank of Brazil. According to Gustavo Franco, the ex-Governor of the Central Bank of Brazil and one of the architects of the very successful Real Plan, just his team took 10 years from 1984 to 1994 to finally beat hyperinflation with the Unidade Real de Valor daily index and the Real Plan.

Venezuela has been in hyperinflation since November 2009. On 17 December 2009 PricewaterhouseCoopers issued the following statement.

“Venezuela enters hyperinflation

 Inflation in Venezuela has been high for a number of years, and cumulative inflation for three years ending 30 November now exceeds 100%. Venezuela should therefore be considered a hyper inflationary economy, and IAS 29, Reporting in hyperinflationary economies, should be applied by entities in Venezuela in financial statements for the year ending 31 December 2009.”

The duration of Iran´s hyperinflation?

The question about how long Iran will stay in hyperinflation is very easy to answer: as long as too many rials are being created in the Iranian economy. When the Iranian government budgets for inflation to be 30% during the next year, then it is absolutely clear that hyperinflation will carry on for at least the next year.  


Iran can stop the effect of hyperinflation overnight at no cost with the Daily Index Plan which is based on Brazil´s 1994 Real Plan. The Real Plan did not use very costly Dollarization to stop hyperinflation. Instead it applied the principles used under Dollarization to stop hyperinflation without costly Dollarization. The Real Plan marked the end of the use of very costly official Dollarization or an equally costly currency board as solutions for hyperinflation.

The Daily Index Plan has two parts:

  1. Capital maintenance in units of constant purchasing power in terms of a Daily Index as authorized in IFRS twenty three years ago and
    2. Inflation-indexing the entire money supply on a daily basis.

Both part 1 and 2 would currently be done in terms of the daily US Dollar free-market (parallel) rate in Iran during hyperinflation.

The Daily Index Plan is guaranteed to stop the effect of hyperinflation (not actual hyperinflation - that depends on the excessive creation of rials) in Iran (or high and hyperinflation in any other economy) at no cost and stabilize the economy.

The Daily Index Plan is recommended for the following countries in hyperinflation:

Belarus

Venezuela

Islamic Republic of Iran

Democratic Republic of Congo

The Daily Index Plan is recommended for the following countries in high inflation:

Ethiopia

Sudan

Guinea

Republic of Yemen

When the US Dollar free-market daily rate is used as the Daily Index during hyperinflation then the economy would be "dollarized" without the US Dollar under the Daily Index Plan but with full monetary policy autonomy available to the Central Bank. The economy would be "dollarized" in  constant real (not nominal) value local currency monetary and non-monetary items maintained constant by the US Dollar daily free-market rate (under the responsibility of the US Federal Reserve) as Daily Index under the Daily Index Plan. The constant real (not nominal) value local currency items would always be exactly equal to their US Dollar equivalents under these circumstances.

All indications are that actual hyperinflation would fall to very low inflation under the Daily Index Plan like it happened under the Real Plan in Brazil in 1994 - only if the creating on new rials are reduced. It is, however, guaranteed that the Daily Index Plan would remove the effect of hyperinflation at any level of hyperinflation. You cannot negate maths.


Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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