Data released by the Central Bank of Iran show relatively higher growth in assets that can be readily changed into cash compared to less liquid assets.
Value of money, or M1, stood at 12,163 trillion rials ($33.3 billion), up 55.6% by the end of fifth calendar month to August 22. It rose 23.3% in five months since the beginning of fiscal year in late March.
Quasi-money, or M2, which reflects less liquid assets grew at a slower rate to 41,854.8 trillion rials ($114.6b) -- up 33.3% y/y. It climbed 8.8% in five months – a slower pace compared with M1.
M1 and M2 are the two components broad money. The former refers to the most liquid assets that can be easily turned into cash. Cash is the highest liquidity asset because it can be traded easily and quickly without any effect on its market value.
M1 includes currency, demand deposits and other liquid deposits like savings. It is the most liquid portion of money supply because it contains currency and assets that either are or can be quickly converted into cash.
M2 or near-money, refers to less liquid assets that can be quickly exchanged for cash. Examples are bank certificates of deposit, treasury bills and long-term deposits.
According to the CBI, the contribution of M1 to money supply stood at 22.5%, up from 20.4% in March. Likewise, M2 accounted for 77.5% of the total money supply, declining 1.9 percentage points compared to March.
M1 is seen as a key inflation-generating component of money supply and its increase means rise in inflation expectations. It also means that savers are less inclined to put money for long in the bank.
Economists and financial observers link the unprecedented growth in M1 to the cash subsidy deposited into bank accounts of selected (needy) recipients after the government rewrote its subsidy policy.
In May the Raisi administration put an end to costly and controversial forex subsidies given to importers of essential goods and started paying cash to eligible recipients, namely the underprivileged hit by the high and rising cost-of-living.
According to CBI data, total value of banknotes and coins was 889.9 trillion rials ($2.43b) by August 22 -- 22.5% higher on the same period last year. It was up 3% over five months since March.
Key Monetary Data
The CBI said broad money and the monetary base continued to decline in the calendar month to August 22. Broad money stood at 54,017.4 trillion rials ($147.9b) in the said period, up 11.8% in five months.
On annualized basis, broad money increased 37.8%.
Broad money growth could be lower had it not been for the lengthy accounting operations resulting from a megamerger of five banks with the state-owned Bank Sepah in December 2020.
Accordingly, transfer of the general ledger of Mehr Eqtesad Bank to Bank Sepah accounted for 2.5% of the broad money growth.
General ledgers record financial transactions that take place during the life of a company and hold accounting information needed to prepare a company’s financial statements. Transaction data is segregated into accounts for assets, liabilities, owner equity, revenue and expenses.
“Excluding the merger of general ledgers, broad money would have risen by 35.5% on an annualized basis,” the CBI said.
Likewise, the monetary base stood at 6,724.4 trillion rials ($18.4b) in the same period, rising 11.3% in the course of five months.
The regulator said the growth has tamped down as the monetary base expanded 12.4% in the first four months of the last fiscal year. It rose 30.3% in 12 months, down considerably from the annualized growth of 42.1% in the same month of the last year.
Money multiplier stood at 8.033, up 0.4% in five months and 5.7% higher on the similar period last year. This indicates that with each rial created in the banking system, money supply increased by 8.033 rials.
Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
