The economy minister Monday denied reports that the government borrowed from the Central Bank of Iran to cover its huge budget deficits in the last fiscal year (March 2020-21).
"The government did not borrow a rial from the CBI last year," Farhad Dejpasand told ICANA, the news agency affiliated to the Majlis.
However, he said the central bank was compelled to "inject money as per budgetary obligations to be able to access financial resources from the National Development Fund of Iran [the sovereign wealth fund]".
That practice is said to be the equivalent of printing money at a time when foreign currency resources of the NDFI cannot be used due to the US economic blockade.
"As such, this is totally different from directly borrowing from the CBI for government spending," he said, adding that laws compel the CBI to pay the rial equivalent of funds taken from the sovereign wealth fund.
Independent of the government, the NDFI was founded to save a portion of foreign currency earnings from oil and gas for future generations. Like all wealth funds, it lends to both public and private firms in need when national revenues are down.
The CBI has often ascribed the expansion of monetary base and ensuing inflation in part to this ill-advised practice. Speaking on state TV in late March, the CBI Governor Abdolnasser Hemmati accused the government's lack of financial discipline for the increase in the monetary base.
"Let's be clear. In fiscal 2019-20 and 2020-21, part of the government spending was by changing the NDFI's currency assets into rials, which simply means printing money," he was quoted as saying.
"This gives rise to inflation. The CBI couldn’t do otherwise due to the budget deficits," he said, adding that "the government's financial discipline is the main dynamic in controlling inflation".
Unpredictability
The monetary base has grown in recent months "mainly due to inconsistent government budget structures and the unprecedented sanctions” unleashed by the former US president, Donald Trump in mid-2018.
It jumped to 29.7% by Dec.20 compared with the same period a year earlier. The figure was 15.5% from March to December.
In recent years the government has borrowed from the fund for emergency spending, like natural disasters and Covid-19.
In October, the CBI begrudgingly had to pay the rial equivalent of €1 billion demanded by the Health Ministry to help medical workers cope with the deadly pandemic.
Buying NDFI currency is a rather superficial move when in actuality its resources are not accessible due to the economic restrictions that have made forex transfers from overseas impossible.
As per procedures, the CBI has to pay the government the rial equivalent of the foreign currency and receive the forex in lieu. However, since much of Iran’s currency reserves are blocked overseas and there is no possibility of unfreezing it in the foreseeable future, the CBI has to keep the money printing machines running to pay the government.
