The Central Bank of Iran says broad money supply and the monetary base increased sharply in the first quarter (March 21-June 21) of this fiscal year largely due to the omnipresent deficits and the government’s lack of fiscal discipline.
The bank published quarterly monetary data on Tuesday that also links the increase in CBI foreign assets (held overseas but not accessible due to the US sanctions) to the ballooning money supply.
As per data seen on the CBI website, broad money supply reached 37,054 trillion rials ($148 billion) at the end of the Iranian Q1, rising 6.6%
This increased by 39.4% in 12 months, up 5.2 percentage points compared to the annualized 34.2% growth in the corresponding quarter last year.
One key factor behind the exponential money supply was the 9.2% growth in the monetary base in Q1 itself the product of the mountain of government debt to the CBI.
Monetary base stood at 5,009 trillion rials ($20b) at the end of the third calendar month to June 21, posting 30.7% or 1,170 trillion rials ($4.6b) increase compared to the same month a year before.
Net government debt to the CBI increased by 633 trillion rials ($2.5b) or a staggering 281.6% in three months, contributing to 13.8% of monetary base growth in Q1.
CBI’s lending to the government in the form of discretionary spending and decline in government deposits with the CBI were the main reasons behind the high government debt to the central bank.
According to the CBI report, the government borrowed 555.3 trillion rials ($2.2b) from the CBI to meet its budget needs in the first quarter.
The regulator said discretionary spending by the Rouhani administration increased on the previous fiscal year. As per a Cabinet decision on June 16, the government was allowed to borrow 4% of the fiscal budget spending from the CBI, up from the initially mandated 3%.
As such, the CBI was obliged to lend to the government from the original 412.1 trillion rials (equivalent to 3% of the projected budget revenue) to 549.5 trillion rials.
Need for increased discretionary spending rose after the government failed to realize projected revenues in the budget. For example, income from tax from stock trade in Q1 declined sharply due to bearish market.
Another contributing factor to expansion of monetary base was the rise in the CBI’s foreign assets, which increased 30.6% in one year to 4,790.9 trillion rials ($19b) on June 21. That alone added 29.3% to the annual growth of the monetary base.
Components of Money Supply
As for the main components of money supply, the CBI said the share of money (M1) was 7,261.9 trillion rials ($29b) on June 21 or 44.6% higher compared to the same period last year. M1 increased 5.1% in three months.
The total value of banknotes and coins in circulation was 715 trillion rials ($2.8b) by the end of Q1, 23.7% higher on the same period last year. It was down 2.7 % over three months since March 21, marking the beginning of the fiscal year.
Juxtaposing new monetary data with previous statistics, the CBI said M1, as one key inflation-generating component of money supply, increased at a much slower pace in recent months.
M1 growth declined to half its recent high of 88.6% in October 2020, which was construed by the CBI as decline in inflation expectations. Declining M1 growth means people’s deposits were parked longer in banks and long-term deposit gained traction.
The contribution of M1 to money supply declined slightly from 19.9% in March to 19.6% in June. Similarly, the share of M2 rose from 80.1% to 80.4% in the period.
Quasi-money (M2) grew at a slower pace compared to M1 and was over 29,792 trillion rials ($119b) to post 38.2% growth on an annualized basis. It rose 7% in the reviewed three months.
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.
Increase in money supply can be a function of either the monetary base or money multiplier. Money multiplier reached 7.397 points at the end of Q1, which was 2.3% lower compared to three months before but 6.7% higher compared to the corresponding period in the last fiscal year. This meant that with each rial created in the monetary system in the past year, money supply increased by 7.397 rials.
Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
Economists and monetary experts say when increase in money supply is caused by money multiplier, it shows that banks are doing well in attracting deposits and giving loans.
However, when increase in “unbridled money supply” stems from the monetary base, it indicates that the government is counting on the resources of the central bank.
