Governor of the Central Bank of Iran Abdolnasser Hemmati said Friday the government will use part of the existing money supply to plug the fiscal deficit.
Hemmati said this in his social media account in response to rising concerns over the likely negative impact of expanding money supply on consumer price inflation.
Acknowledging that growth in money supply has always been a “structural phenomenon” in Iran’s economy, he added, dismissing predictions by experts about rising inflation due to the ever-growing money supply.
“Existing broad money and even its future growth cannot lead to high inflation… because a portion of the money will be used for taming the budget deficit,” he wrote.
In a press release on Wednesday the CBI said money supply shot up to 26,541.6 trillion rials ($139.5 billion) by the end of the first quarter (March 20- June 21) of the current fiscal year, or 7.3% compared to the same quarter last year.
It said broad money grew 2 percentage points compared to the 5.3% growth recorded for the first quarter of fiscal 2019-20.
The monetary base also increased 8.8% over the past three months to reach 3,834.7 trillion rials ($20 billion) by the end of the Q1.
CBI reported an unprecedented growth in money supply over seven years in the last fiscal year when it reached 24,721.5 trillion rials ($137 billion), positing 31% annual growth.
According to Hemmati, increase in the monetary base during the last fiscal year was higher than the average of past 50 years. “However, the growth was not significant given the huge budget deficit.”
Apart from the bond market, the government has approached the booming stock market to raise funds to fill budget holes. Among other things, it has launched a divestiture scheme that involves selling shares in state-run companies via exchange traded funds
He reassured the public that the government can and will compensate for its budget deficits better that before with the CBI’s monetary policies.
“So far as monetary and currency management is concerned, I can reassure that the government’s budget deficits will certainly be managed better than previous years,” he said.
The senior banker referred to measures such as selling bonds in the interbank market and selling government assets via the stock market as the main components of the government’s approach to plugging budget deficits without increasing the monetary base.
“In fact, selling government assets and funding the budget by issuing bonds means using the money supply in the economy without overloading the monetary base”.
Government borrowing from the CBI and printing money are seen as the main drivers of the unprecedented increase in the monetary base.
To expedite the sale of government bonds and encourage it to do away with borrowing from the central bank, the CBI has launched a series of bond auctions since May. So far the government has sold 233 trillion rials ($1.2 billion) in bonds via five auctions and plans to sell more in the weekly auctions.
Apart from the bond market, the government has also approached the stock market in recent months to raise funds to fill the budget holes. It has launched a divestiture scheme that involves selling its shares in state-run companies via exchange-traded funds.
Euro-Based CDs
The bank governor said last week the CBI is planning to launch euro-denominated certificates of deposit to reduce the volume of rials held by the public and control the money supply.
Hemmati said the bank will soon send the proposal to the Money and Credit Council, the top banking and monetary policymaking body in Iran, for approval.
The euro-denominated CDs will bear fixed interest rates.
“With adequate reserves of euro banknotes, the CBI will be committed to reimburse the CDs in euro on the maturity date,” he said.
The move is in line with a series of CBI efforts to curb the ballooning liquidity and guide inflation toward the declared 22% target for the current fiscal year.
