The Central Bank of Iran is ready to use its new open market operation system to help government address some of its economic problems triggered by the tough US sanctions, the CBI governor said.
“Drawing on the experience of central banks in other countries in managing monetary policies, the CBI developed a set of [monetary] instruments in the past year and a half,” Abdolnasser Hemmati said in a note in his social media account.
With the help of such instruments, Hemmati said, the CBI aims to control economic volatilities and help shore up the economy.
CBI launched the OMO in January as part of its monetary policy to help curb inflation, control interest rates in the interbank market and improve liquidity management.
Iran is grappling with an annual 35% inflation rate as shown by the Consumer Price Index for goods and services in the 12-month period ending March 19, according to the the Statistical Center of Iran.
The World Bank said Iran's economy shrank 8.7% in 2019 compared to the previous year. However, WB forecasts for Iran's GDP growth are 0% in 2020 and 1% in both 2021 and 2022.
The contraction of Iran's economy in 2019 was mainly due to external shocks inflicted on d by the oil and gas sector. Plummeting oil exports come after the expiration of US waivers temporarily granted to major Iranian oil importers and further tightening of banking restrictions, in addition to new sanctions imposed on its petrochemicals, metals, mining, shipping and insurance sectors.
Pointing to the tough economic conditions, Hemmati said the CBI will be able to boost the economy through the main components of its monetary policy, i.e. OMO and interest rate corridor (IRC).
Under the IRC framework, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move in this setup.
In addition, within the OMO framework, central banks buy and sell bonds in the open market to increase or reduce money supply. They buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates. By the same token, selling government bonds reduces base money and raises interbank rates.
OMO is essentially used by monetary authorities to regulate the cost and availability of credit in the banking system and influence the level of money supply.
Hemmati pointed to government plans to fund a portion of its budgetary needs in the new fiscal year (March 2020-21) by selling Islamic bonds. “This will not only help fund the budget, but also help banks correct their balance sheets”.
The senior banker said earlier that the regulator was concentrating on the OMO in the hope that the new monetary policy would help curb inflationary effects of the ballooning liquidity, as past measures had failed to produce the desired results.
Latest report by the CBI shows that liquidity crossed 22,623 trillion rials ($140 billion; $1=160,000 rials) by last December to register 28.2% annual growth.
Expanding OMO
To further expand the scope of OMO and the monetary policy, the CBI on Wednesday approved guidelines for trading repurchase agreements (repos) and reverse repos.
Repos and reverse repos are used for short-term borrowing and lending, often overnight. Central banks use reverse repos to add money to the money supply via open market operations. In case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys it back the following day at a slightly higher price. Within reverse repo securities are purchased in order to sell them back at a slightly higher price.
CBI has asked lenders to allocate a portion of their assets to trade in bonds. “Given that in the new framework [OMO], the CBI manages liquidity of banks and non-bank credit institutions based on the issued Islamic bonds… they need to allot a portion of their assets to [buying] bonds,” the CBI said on its website.
Open market operations are backed by provisions of the fiscal (March 2020-21) budget. In Note 5 of the budget law, the government has envisioned implementing OMO for “enforcing monetary policy, managing interest rates and controlling inflation”.
Accordingly, the CBI is allowed to collateralize banks’ debts in a gradual manner so that at least 50% of banks and credit institutions’ debts to the CBI are collateralized by debt bonds issued by the treasury.
