The Central Bank of Iran in a report said that the monetary base has increased extraordinarily in the past several months largely due to government borrowing from the CBI.
The total money in circulation crossed 5,000 trillion rials ($20.8 billion) at the end of the third calendar month to June 21, posting 30.7% or 1,170 trillion rials ($4.8b) increase compared to the same month a year before. That was the highest point-to-point growth in the past 11 months, the CBI website said.
It also was 9.2% higher in the first quarter (March 21-June 1) of the current fiscal year, up 0.6 percentage points compared to the 8.6% in Q1 of last year.
In its report the CBI noted that the huge expansion in the monetary base in the first quarter was the outcome of government borrowing from the central bank for discretionary spending.
Without providing figures, the bank said that the treasury’s discretionary spending has increased over previous fiscal year. As per a decision by the Cabinet on June 16, the government can borrow to the tune of 4% of the spending allowed in the budget.
Earlier, Hamid Pourmohammadi, deputy head of the Plan and Budget Organization for economic affairs, said that the government borrowed 400 trillion rials ($1.7b) for discretionary spending from the CBI in the first two months of current fiscal year (March 21-May 20).
Under the seemingly improving pandemic conditions the government was supposed to borrow not more than 3% of fiscal budget this year. Total government spending mentioned in the budget is 8,410 trillion rials ($36b) and 250 trillion rials ($1b) can be taken as credit.
Apart from discretionary spending needs, the CBI also blamed the monumental increase in the circulation of money to the payments for the guaranteed purchase of wheat by the government.
The CBI said it paid 20 trillion rials to the Organizations Targeted Subsidies to be reimbursed to the Government Trading Corporation of Iran for wheat purchase from local farmers.
Every year the government buys strategic crops, including wheat, sugarbeet, tea, barley, cotton and oilseeds, from local farmers at guaranteed prices to control the domestic market for such basic products and fill its strategic reserves.
OMO Help
Despite the jump in the monetary base, the CBI said that “it partly managed to neutralize the impact of government borrowing by regularly implementing open market operations”.
The CBI has restrained money supply in the interbank market by implementing reverse repurchase agreement in the past two months to curb banks’ ballooning liquidity in the interbank market.
As a component of OMO, a reverse repo is a short-term agreement to purchase securities in order to sell them back at a slightly higher price. Repos are typically used to raise short-term capital.
The value of reverse repos implemented by the CBI was 157.9 trillion rials ($657 million) in the month ending June 21.
Inflation Expectation Declining
Referring to some positive development in international efforts to restore Iran’s 2015 nuclear agreement, the CBI said “there are positive signs that inflation expectations are declining.”
This is also seen in decline in the growth of money (M1) as the “inflation-generating component” of money supply. The CBI said M1 growth declined from a recent high of 88.6% in October 2020 to 44.6% in late June.
M1 is composed of physical currency and coins, demand deposits, travelers' checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts.
The CBI said curtailing M1 growth means customers’ deposits are staying longer in banks and long-term deposit are gaining traction.
Reflecting on trends in the asset markets, the regulator said prices rose slightly in the housing, stock and currency markets in the month. It stressed that it is closely monitoring the financial markets and would take the necessary measures if it perceives that growth in asset markets is due to increase in inflation expectations.
“It must be noted that if rise in asset prices denote change in inflation expectations, the monetary policymaker may take due measures.”
One such measure “could be change in the interbank rate,” the CBI conveyed. While interbank rates were of the declining order in the past few months, updates by the CBI indicate the decline has paused.
Interbank rate clawed back to above 18% to reach 18.31% on Wednesday after it declined to 17.95% almost a month ago.
Stock and currency markets in Iran are highly sensitive to interbank rates. Lower rates make investment in such markets rewarding while higher rates make investment less attractive.
