In a report on macroeconomic developments, the Central Bank of Iran said the money supply and monetary base continued to expand in the previous calendar month (ended May 20).
The monetary base grew 6% compared to the month earlier, which was the highest monthly rate in 14 months (since March 2020), according to the CBI report seen on its website.
It said the monetary base reached 4,890 trillion rials ($21.3 billion) in the month -- 280 trillion rials ($1.2b) expansion in one month. The amount shot up 7.3% in two months since the beginning of fiscal year. Compared to the same month last year it climbed 30.6%.
Likewise, broad money supply was near 36,010 trillion rials ($156.5b) in the mentioned month rising 38.8% compared with the corresponding month last year. Since the beginning of the fiscal year in March money supply rose 3.6%.
Compared to the end of last fiscal year the money supply declined by 1.8 percentage points.
As an influential component of money supply in driving inflation, money (M1) increased again in the reviewed month after registering negative growth a month earlier.
M1 increased 47.2% on an annualized basis to reach 6,940 trillion rials ($30b). On a monthly basis it was up 5.1%. A month before M1 had declined 4.3%.
Despite the monthly increase, the CBI said M1 growth lost momentum compared to its recent 88.6% rise in October 2020.
Quasi-money (M2) increased 2.7% compared to the earlier month amounting to 29,070 trillion rials. It increased by 32.9% on an annualized basis.
M1 is 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.
US Economic Blockade
Money supply has reached unprecedented levels due mainly to the US economic blockade, growing government budget deficits and Covid-related monetary policies.
The tough US sanctions have hurt crude oil export, the lifeblood of Iran's economy and lack sustainable revenue since 2018 (after Donald Trump imposed new economic restrictions) has led to a disconcerting pattern of deficit spending.
High Spending Blamed
The CBI linked the increase in monetary base to rise in credits the bank gives to the government as the discretionary spending.
The CBI did not mention how much the CBI has lent to the government. However, Hamid Pourmohammadi, the Plan and Budget Organization’s deputy for economic affairs, said earlier the government borrowed 400 trillion rials ($1.7 billion) in discretionary spending from the CBI in the first two month of current fiscal year (March 21-May 20).
“This accounts for 4.7% of the total budget spending in the current fiscal year,” Pourmohammadi told state TV.
This is while the government is allowed to withdraw the equivalent of 3% of the public budget from the CBI, the Persian-language economic website Eqtesad News said.
However, the government has borrowed 6% of total fiscal budget in three years due to multiple unforeseen developments like the Covid-19 pandemic and the disastrous floods.
With the adverse economic effects of the pandemic subsiding, the government was supposed to borrow discretionary credit worth no more than 3% this year.
As per provisions in the budget law, total government spending is 8,410 trillion rials ($36b), 3% of which is 250 trillion rials ($1b).
Simply put, the government has borrowed 150 trillion rials ($652 million) above the amount envisioned in law.
