The Money and Credit Council - the top monetary decision-making body - approved a proposal by the Central Bank of Iran to issue a new type of ‘Wadieh’ Islamic bond to tame money flow.
According to a CBI press release, the bonds will have a 2-year maturity with interest rates proposed by the CBI. Interest will be determined subject to inflation but “will not exceed the annual inflation rate”.
Not much is known about Wadieh bonds, including the amount and date of issue. However as the name suggests (Wadieh in Arabic means deposit), it appears that it would be similar to certificate of deposits with the difference being that the latter bears a fixed interest rate while in the former people deposit their money with banks to receive the principal on maturity plus an unspecified amount in interest.
The interest is not known prior to the contract and is calculated subject to domestic inflation rates.
The move is apparently in line with a series efforts to control the ballooning money supply and avoid further cash flow rattling financial markets. The ultimate goal seems to be reducing inflation by limiting the amount of active money in the economy.
Payman Qorbani, a CBI vice governor said earlier that “by issuing 100 trillion rials [$454 million] in Wadieh bonds will help reduce broad money growth by 2.8 percentage points.”
The CBI’s latest report shows that growth in broad money shot up in one year, rising 34.2% by the end of the calendar month to June 21 compared to the same period last year.
Broad money reached 26,571.7 trillion rials ($115 billion), growing 7.5% in three months from the beginning of the current fiscal year in March.
As per published data, the monetary base grew to 3,834.7 trillion rials ($16b) by June 21, indicating 8.8% growth since the beginning of fiscal year.
CBI Governor Abdolnasser Hemmati unveiled a similar plan earlier to launch euro-denominated certificates of deposit to reduce the volume of money held by the public. He said the bank will soon send the proposal to the MCC for approval.
“With adequate reserves of euro banknotes, the CBI will reimburse the CDs in euro on maturity date,” he said.
The CDs move is also in line with a series of government moves to curb the ballooning liquidity and guide galloping inflation toward the CBI-declared 22% target for this Iranian year.
