Why do producers, traders and other economic players complain about lack of resources, despite a 35% growth in money supply? Why are banks struggling with the provision of credit? Abdolnasser Hemmati, the former head of the Central Bank of Iran, prefaced his write-up for the Persian daily Donya-e-Eqtesad with these questions.
A translation of the text follows:
The rapid growth of foreign exchange rates against the rial in the open market, and more importantly, the discontinuation of the allocation of subsidized currency to import essential goods are to blame.
A part of the newly created money is not being allocated to companies. According to the latest statistics, $18 billion in subsidized foreign currency [at the rate of 42,000 rials per US dollar] were allocated to imports in the Iranian year ending March 20, 2022; by the discontinuation of forex subsidies and replacing it with the currency rate of 285,000 rials per US dollar, the need for additional money to provide working capital for companies increased dramatically. This put extra pressure on banks to pay debt relief and buy bonds issued by the government to cover the budget deficit.
Narrow money in the years ending March 20, 2017, and March 20, 2018, was between $320-340 billion. At present and despite the 30% growth of money supply in recent years, the supply is equal to $125 billion at the open market rate and $210 billion at the rate set in the Integrated Forex Deal System, locally known as Nima. In fact, the money supply in terms of dollar is 60% of the years before the US sanctions and maximum pressure.
One of the reasons behind the increase in the market interest rate is the same pressure coming from the need for money.
Wrong Decisions Compounded Problems
Given the current process of money creation and its distribution among different sectors, which is mainly due to inflationary expectations, the exchange rate should either decline, or supply should increase. This is a too complicated issue to solve by a single ruling, especially now that the government and its economic team have yet to unveil a plan to solve the issue; their wrong decisions have compounded the problems.
Any further increase in money supply will definitely fuel inflation and the persistence of the current situation will lead to further recession in real economic activities, given the lack of money in production sectors.
Of course, sanctions are also to blame for a significant part of problems on the supply side of the production sector. Therefore, monetary measures on the demand side cannot solve all the supply problems, but with the rise in the level and fluctuation of inflation to very high figures in the Iranian economy, businesses and investment programs are facing serious obstacles.
Inflation is hurting the real economic sector in an unprecedented way. Monetary statistics indicate that narrow money compared with pseudo-money has reached 24%. Statistics provided by banks regarding pseudo-money are actually long-term deposits that customers are allowed to make daily withdrawals and deposits into. Therefore, they are actually money and not pseudo-money.
The real share of money in supply is more than what monetary statistics show. Therefore, high inflationary expectations have resulted in monetary impulses being immediately discharged on inflation and have no effect on the real growth of the economy. With the increase in inflation and foreign currency exchange rates, companies need more resources than before. Of course, if it were not for the banks’ imbalances, the pressure caused by the need for money would have increased the interest rate, and this significant increase in the interest rate could have contained inflation. But under the current situation of the banks, unfortunately, the increase in interest rate will aggravate the financial imbalance of banks and create more money and also affect the capital market.
We are going through difficult times. This is the issue that I have always emphasized: The fundamental solution is to revive the nuclear agreement as soon as possible and try to develop relations with the world. One of the short-term results of such a move will be the increase in oil exports, the development of banking and commercial exchanges, the reduction of international exchange costs, and above all, the halt of irrational growth in exchange rate.
