Data released by the Central Bank of Iran show a significant increase in monetary indicators during the first six months of current fiscal year (March 20- Sept. 21), raising fresh concerns about consumer price inflation.
Broad money supply reached 28,958.9 trillion rials ($107 billion) at the end of the H1, indicating 36.2% growth compared to the same period last year.
The report indicates that money supply grew by 17.1% in the six months and reflected on the main components of money supply including money circulating in the economy plus quasi money.
Accordingly, the share of money (M1) in the financial system was 6,007 trillion rials ($22.2b) by Sept. 21 -- up 80.2% year-on-year. M1 also increased 40.6% during the H1.
Quasi-money (M2) reached 22,951.9 trillion rials ($85b) to post 28% growth on an annualized basis and 12.2% in H1.
M1 is money supply composed of physical currency and coins, demand deposits, travelers' checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts. M2, also called near-money, refers to less liquid assets that can be quickly exchanged for cash. Examples are bank certificates of deposit and treasury bills.
The total value of banknotes and coins circulating among the people was 599.6 trillion rials ($2.2b) by Sept. 21, posting 20.3% growth compared to the same period last year. The figure, however, declined by 1.9% over six months since the beginning of the fiscal year.
Exponential Growth
Iran’s monetary system has recorded some of the most staggering figures in money supply expansion. Money supply has expanded exponentially in the past 50 years. Records say money supply growth was 16.9% on average in the 1960s, 30% in the 1970s, 18.4% in 1980s and 26.7% during 2000s (end of March 2020).
Accordingly, the highest annual growth was in fiscal 1974-75 -- at 57% followed by 2006-07 at 39% and 38% in 1995-96.
As to what has led to the ballooning money supply, the CBI earlier blamed multiple factors, mainly the government’s over-borrowing from the CBI and the National Development Fund of Iran, the sovereign wealth fund, even when NDFI funds in foreign currency were not accessible due to the US sanctions.
In response to the government’s request to tap NDFI resources to fight natural disasters and the coronavirus pandemic, the CBI has no choice but to keep paying the rial equivalent of money the government borrows from the fund.
The procedure is said to be the main reason behind the expansion of money supply as the CBI should print money for rial payment until the NDFI resources are freed and accessible.
Asset Increase
The CBI Governor Abdolnasser Hemmati has said this is “tantamount to borrowing from the central bank”, at least in the short-term and until the government finds a way to unlock its overseas assets and use it to settle the rial payments.
As the CBI continues to buy NDFI resources, it says that its foreign assets have grown remarkably in value. As per available data, the net value of CBI foreign assets reached 3,631.8 trillion rials ($13b) by the end of the H1, up 36.7% on annualized basis.
The monetary base jumped from 2,951.2 trillion rials in H1 last fiscal year to 3,720.6 trillion rials ($13.8b) in the first half of current year, indicating 26.1% growth annually. The base has grown 5.4% in six months since the beginning of the year.
Despite remarkable annual growth, CBI’s monthly data show that the monetary base growth has lost pace compared to previous months.
The monetary base registered 30.8% annual growth in the month to July 21, the fourth month of the Iranian fiscal year, but dropped to 26.8% a month later.
In a post on his social media account on Friday, Hemmati said CBI’s efforts will continue to curb the growth of the monetary base. He added that the efforts, among other things, include measures to improve the balance sheets of banks. One measure was the decision to restore banks' reserve requirement to pre-coronavirus levels after it was cut in March to support businesses hurt by the deadly disease. The reserve ratio is now between 10% and 13%.
