Interaction between the government and central bank must be restructured to be able to tame inflation and reach sustainable and decent economic growth.
“This [among other things] means the government should avoid borrowing from the CBI,” Ali Salehabadi, the governor of the Central Bank of Iran told state TV late on Sunday.
Budget deficits push up money supply along with inflation. Recent CBI data show broad money supply increased to 44,270 trillion rials ($167 billion) by Dec. 21. It was 41.4% higher on an annualized basis.
Experts say the figures are staggering and unprecedented in recent memory, blaming the deepening economic challenges that compel governments to borrow from the CBI to be able to pay its bills.
The unbridled money supply, rising foreign currency prices and a host of other unsolved economic problems have spawned the high and forever rising inflation.
According to data from the Statistical Center of Iran, the average goods and services Consumer Price Index in the 12-month period ending Jan. 20 increased by 42.4% compared to the same time last fiscal year.
Salehabadi said improving government-CBI relations depends largely on the latter’s approach to the national budget.
“The government’s ties with the CBI must be balanced. We are focusing on building a consensus on how to improve performance so that deficits can be avoided.”
Another key factor, he said, is the need to change the CBI’s relation with banks. “That means that lenders should avoid resorting to the CBI for funds to cover their deficits.”
Lenders need to realize the pressing need for robust control over deposits and lending policy to be able to improve their balance sheets, he stressed. “Given its impact on inflation, creation of money by banks is one of the major constraints.”
Banks must also curb unnecessary growth of their balance sheet or they would be penalized as per rules of the Money and Credit Council, he warned.
Penalties include higher reserve requirement of dysfunctional banks. Reserve requirements not only guarantee deposits, but also serve as a CBI tool for controlling money circulation, inflation and money supply growth. The CBI determines the reserve requirement ratio of banks.
The central bank is allowed to set the reserve ratio between 10% and 13%, based on the bank lawfulness. This means that the regulator reduces the reserve requirement for disciplined banks from 13 to 10%.
Forex Revenue Improving
The CBI boss said he is optimistic about the rise in foreign currency revenue in the next calendar that begins in March, giving a promising account of higher non-oil exports in the past several months.
He added that the secondary market (known locally as Nima), where the forex is traded in hawala, and regulated forex market, where wholesale currency is exchanged in banknotes between banks and authorized exchange bureaus, have reported growth in currency deals.
“Almost $1.6 billion was traded in the regulated market since the beginning of the fiscal year up till now. That was four times higher on the same period last year”.
In addition, non-oil exporters sold $25 billion in the Nima market during the said period. The figure was up 42% compared with the whole of the last fiscal year’s $17.6 billion.
Nima is a currency trade platform through which non-oil exporters offer their overseas income and companies buy to pay their import bills.
“Figures indicate a reasonable supply of currency in the market and we have been able to respond to the forex needs.”
The historic decline in oil exports as result of the 2018 US economic blockade hurt the government(s) forex revenues and compelled it to promote non-oil export as an alternative source of currency income.
