Taking stock of the extended volatility in Iran’s financial markets, the Majlis Research Center examined the root causes and offered some potential solutions.
In the view of the parliamentary research center, the root cause of turbulence lies in the government’s monetary policy.
Increasing interbank interest rates, adopting measures to improve banks’ balance sheet, doubling efforts to unfreeze currency overseas and tightening rules on the repatriation of export earnings are among the MRC’s short-term solutions.
As for the mid-term, it said the Central Bank of Iran should mobilize efforts to stabilize the chaotic forex market and use its limited currency reserves vigilantly. Borrowing from the National Development Fund of Iran (NDFI) to pay for government spending must stop, it stressed.
The MRC enumerated key measures that can have a more in-depth impact albeit in the long-term. Rewriting budget policies, overhauling monetary and banking rules, increasing oversight of banks and finding a working solution to the future of failing banks needs to be prioritized.
The think tank pointed to the strong correlation between money supply, rising forex rates and consumer price inflation, saying that the ballooning money supply in recent months in tandem with soaring forex rates have given rise to consumer prices.
The CBI reported higher growth in of the monetary base during in the first fiscal quarter (March-June) compared with the same quarter last year. It was 8.8% in Q1 compared to 3.3% in the same period in 2019 and 2.2% in 2018 Q1.
MRC said the share of money in the composition of money supply reached 19% in mid-June, the highest since 2012. It also grew 61.5% on an annualized basis, which simply means the CBI was creating more money thanks to its printing machines.
Budget Deficits
The MRC blamed the government for the staggering rise in the monetary base as it has been borrowing uninterruptedly from the central bank to plug budget deficits.
Withdrawing from the NDFI, the sovereign wealth fund, and using currency reserves at cheap rates for imports were also seen as factors expanding the monetary base.
Given that the NDFI currency reserves are not accessible due to the US sanctions, the CBI has been forced to pay the rial equivalent of the money the government borrows from the fund.
The MRC also criticized CBI policy to use the scarce forex reserves and subsidize it for import needs, saying that “the bank could earn more by selling the currency at higher rates and limit expansion of the monetary base emanating from NDFI withdrawals.”
When forex rates jumped in the spring of 2018, the government subsidized currency rates for importing essential goods and raw materials. Since inception the policy was censured from many quarters because of its potential for rent-seeking and corruption.
A subsidized dollar costs 42,000 rials but fetches 310,000 rials in the open market. The greenback is sold around 240,000 rials via the secondary market, known as Nima, which is venue for exporters and importers to deal in foreign currency.
While chronic has been a perennial challenge, prices have been rising since 2018 due mainly to rising expectations among the public about the increase in currency rates. The speculative features of the forex market were triggered anew by the US sanctions after Donald Trump walked away from the landmark Iran nuclear deal and unleashed his hostile “maximum pressure” policy against Tehran.
The situation worsened with the historic decline in oil exports, tightening of US restrictions on banking and money transfer and difficulties in importing raw material and intermediate goods that disrupted economic activities.
“Fighting inflation in long-term and in a sustainable manner requires many structural reforms,” the MRC said, particularly underscoring the need for reform in banking system and budget structure.
A glance at financial markets, among other things, shows high inflation expectations among the people as they rush to the safe havens (gold, currency and stock markets) to protect their rapidly depreciating savings.
