Al-Monitor | Navid Kalhor: Inflation is quickly rising in Iran on the back of a continuous and uncontrollable growth of liquidity. Two basic factors explain the ongoing slump in the economy. One is the ineffectiveness of the government's fiscal policies. The other is the monetary objectives of the Central Bank of Iran (CBI); these are frequently dictated by governments, including that of President Hassan Rouhani. As a result, the Iranian banking system has been consistently used as the main apparatus to finance the budget deficits of state bodies, whether under critical or normal circumstances.

Public finances have been routinely misallocated and squandered due to inefficiencies in fiscal policy and factors such as dysfunctional supportive policies, direct distribution of public resources among citizens and enterprises, subsidies for energy, direct government intervention in price making, low public sector efficiency, large government size and lack of budget transparency.

Indeed, the surge in government expenditures has been the key source of unbalanced budgets and structural budget deficits. The budget�s operating balance gap is alarming. It was more than 750 trillion rials ($17.8 billion) in the Iranian year ending March 20, 2017 and about 390 trillion rials ($9.2 billion) in the first four months of the current Iranian year (beginning March 21, 2018). Last year, the government spent a whopping 45% more than its revenues. Part of this differential was funded through the sale of oil; the rest is slated to be accumulated as the liabilities of the government. The gap between government resources and its expenditures combined with its respective accumulated liabilities is ultimately transmitted directly or indirectly to the country's banking system. This, in turn, accelerates liquidity growth. At present, should US sanctions be applied in this equation and oil exports as a result drop on a large scale, the administration is positioned to witness a serious shortage of resources. This shortfall will ultimately push the central bank to raise the monetary base via printing fiat money and sending the rial down against the greenback.

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