The 29th Monetary and Banking Conference in Tehran ended Tuesday after debating the trends in inflation and adopting strategies to curb it.
Organized by the Monetary and Banking Research Institute, the annual meeting was opened by Shapour Mohammadi, head of the research center and was attended by academia, economists and market experts. Economy Minister Ehsan Khandouzi and the Governor of Central Bank of Iran Ali Salehabadi were also present at the two-day gathering.
Khandouzi pointed to the role of monetary factors and volatility in forex rates as the two major factors pushing up inflation rates and said moves to tame inflation must address both components.
“It has been proven that currency rates have an immediate and short-term impact on the economy while the monetary aspect has a long-term and deeper impact,” news outlets quoted him as saying.
“Economic stability is indeed a function of controlling monetary factors, independence of the central bank and minimizing budget deficits.”
He concurred that the economy is grappling with high and rising inflation and controlling it will have a positive impact. “Inflation is high whenever development indices worsen and vice versa,” he told the conferees.
Teymour Rahmani, an economics instructor at Tehran University, voiced similar views and stressed that runaway inflation in Iran, among other things, is because spending outweighs income.
“The persistence of inflation over five decades amply shows that we spend more and produce less.”
In his view, sustainable economic growth is a panacea for chronic inflation. However, this must be accompanied by concerted efforts to control money supply. To bear fruit, concerted efforts must include a restructuring of forex policies, controlling bank balance sheets, reducing government spending and moving away from the controversial government(s) policy of issuing bonds to cover budget deficits.
The goods and services Consumer Price Index (using the Iranian year to March 2017 as the base year) stood at 429.6 in the month ending May 21, indicating a 3.5% rise compared to the previous month, making it the highest in six months,
The average CPI in the 12 months to May 21 increased by 38.7% compared with the corresponding period of the year before.
Copping Strategies
Speakers from the central bank focused on ways and means to control inflation rates unseen in recent memory. The CBI boss Salehabadi referred to collaboration with government budget planners to reduce its multi-billion-dollar borrowing from the CBI for deficit spending.
In this regard he spoke about a plan to set up a consultative body named “Financial Stability Council” to align government fiscal policy with the CBI’s financial policies.
“The council should help control expansion of the monetary base. It also can regulate government spending to avoid money issuance,” he said, underlining the need to also improve in tandem the domestic debt market.
Direct borrowing from the CBI is a red-line the government is not supposed to cross, he noted. The senior banker said lenders have become less dependent on the CBI and are meeting their liquidity needs through interbank market. “Excess borrowing from the central bank has declined to less than half compared with last year”.
Asghar Abolhassani, a CBI vice-governor, said the CBI has drafted comprehensive plans to control the money supply.
Supply shocks, monetary factors, inflation expectations and rise in import costs arising from higher prices in international markets are the four determining factors driving up inflation in Iran, he added.
“In recent years the economy has not grown in conjunction with the expansion of money supply.”
Peyman Qorbani, the CBI deputy for economic affairs, said the government and CBI have developed mechanisms to reduce budgetary dependence on discretionary spending -- usually borrowed from the central bank at the beginning of the fiscal year.
Citing data, he said the CBI has been able to keep monetary factors in check in recent months, linking the recent bout of inflation in consumer prices more to supply shocks and the ensuing inflation expectations along with rising production costs.
Role of Banks
Almost all speakers took stock of the role of the financial indiscipline of banks in issuing money and by extension adding to the volatility in the financial system.
Banks have forever been criticized for weak balance sheets and huge gaps between their income and expenses, which almost always have compelled them to approach the CBI for funds.
Economists and experts say bank balance sheets have hurt their lending capacity, deepened the recession and impacted inflation through their detrimental effect on money supply.
The CBI earlier announced plans to monitor bank balance sheets at regular 3-month intervals. Investment in non-bank activities, increase in spending, expanding branches and buying fixed assets obviously are the most detrimental areas that the regulator wants lenders to get out from sooner rather than later.
