Explaining Large Inventories: The Case of Iran
World Bank MENA Working Paper No. 48
30 Pages Posted: 27 Oct 2006
Date Written: September 2006
According to the national accounts of Iran, during the period of 1988-2003 the annual change in inventories in this economy was highly variable and averaged 7.3 percent of GDP if calculated at current prices. In an ideal economy with no distortions, change in inventories should be zero on average for a sufficiently large period. Because of inefficiencies and statistical errors, in developing countries it typically falls in a range between one and two percent of GDP. The figure for Iran exceeds not only this range, but also economy's real GDP growth, which averaged 4.3 percent for this period. In this paper we argue that variation in the change in inventories in Iran could be explained by a number of factors including: impact of cost of capital effect and supply shocks expectations in a context of high dependency on the oil revenues and imports of capital/intermediary goods; periodical softening and hardening of budget constraints of the public enterprises; variations in statistical errors related to differentials between PPI and CPI inflation; and possibly shifting financial constraints which may bind on private purchases of goods and services. Further, there is evidence to suggest that high average change in inventories could be explained by capital flight hidden in the imports statistics, by wasting some of the over-accumulated inventories under the soft budget constraint, and by statistical errors and omissions.
Keywords: Inventories, Iran, cost of capital, supply shock, soft budget constraint, capital flight
JEL Classification: D21, E22, O47, P44
Suggested Citation: Suggested Citation