Money supply growth made history in the last fiscal year (March 2020-21), reaching the highest in five decades spurred by the high fiscal deficit and Coivid-19.
Data released by the Central Bank of Iran suggest that broad money supply increased 40.6% compared with the year before. Without presenting precise figures, the CBI said the monetary base also grew 29.2% on an annualized basis -- expanded by 1,030 trillion rials to reach 4,550 trillion rials.
“Growth in money supply was largely impacted by the foreign sanctions, the steep decline in forex revenues and CBI obligations to pay for the blocked forex assets [in rial equivalent to the government],” the CBI said in a report published on its website.
While money supply has expanded exponentially over the past 50 years, the growth last year was unprecedented. Records show money supply growth on average was 16.9% in the 1960s, 30% in the 1970s, 18.4% in the 1980s and 26.7% in the 2000s (ending March 2020). The highest annual growth was in fiscal 1974-75 at 57% followed by 2006-07 at 39% and 38% in 1995-96.
The CBI acknowledged that the ever-expansion of money supply is an entrenched issue in Iran’s economic history. However, the root causes of growth in the past two years were different from the past. A combination of the government’s borrowing from the CBI, overburdening the banking sector with mounting obligations to inject money into the economy and weak balance sheets of banks largely are to be blamed for the money supply growth.
However, the unprecedented increase in the net value of the CBI’s foreign assets was instrumental in pushing up money supply in the last fiscal year. “Increase in the net value of CBI foreign assets accounted for 27 percentage points increase in the monetary base growth from the total 29.2% hike last year,” the report said.
It expressed the hope that the regulator would improve control over growth of money supply and monetary base in the future if the US banking sanctions are eased and the CBI has access to the billions in forex assets locked in foreign banks.
Besides the fiscal deficit and Covid crisis, the CBI pointed to volatility in asset markets last summer that led to a portion of its money to be directed into the markets, the capital market in particular.
“Banks were obliged to intervene in asset markets last year by injecting money.” This undermined banks’ balance sheets and partially resulted in money supply growth.
Open Market Operation
The CBI said last year it managed to restore discipline to the interbank market by regularly implementing the open market operation monetary policy that helped curb banks’ role in expanding the monetary base and cut interest rates in the interbank market.
"Controlling money supply in the interbank market through OMO and banks' using regulated borrowing has caused interest rates to move within the policy interest rate corridor.”
While the monetary policymaker has set the upper bound of interest rate corridor (IRC) at 22%, the interbank rate reached 23.2% on Oct. 29. However, rates gradually declined to 19.84% by March 2020.
IRC is a system guiding short-term market interest rates towards the central bank’s target/policy rate. It is a rate at which central banks lend to banks (typically an overnight lending rate) and a rate at which it takes deposits from them (deposit rate).
Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.
The regulator said last year it managed to control rates by weekly implementation of OMO. It paid 891 trillion rials to banks under repurchase agreements with maturity dates ranging from 2-7 days.
As a component of the OMO, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to investors and buys it back on the maturity date at a slightly higher price. Repos are typically used to raise short-term capital.
In addition, the CBI lent 1,829 trillion rials under the OMO mechanism through which banks are obliged to put up bonds as collateral in the interbank market to be able to borrow.
Lower Inflation Expectation
Taking stock of the composition of money supply, the CBI said money (M1) 12-month growth declined from its peak at 88.6% in October 2020 to 61.7% in the year ending March 20.
It attributed the slowed momentum of M1 growth to decline in inflation expectations and bank depositors’ willingness to park their money for longer periods in banks.
The Persian-language economic website Eghtesad News said M1 reached 6,910 trillion rials to March 20, up from 4,270 trillion rials in the same month a year earlier.
M1 refers to highly liquid assets, including physical currency and coins, demand deposits, traveler checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts.
Highlight: CBI said unprecedented increase in the net value of the CBI’s foreign assets was instrumental in pushing up money supply in the last fiscal year. Increase in the net value of CBI foreign assets accounted for 27 percentage points rise in the monetary base growth from the total 29.2% hike last year
