The Central Bank of Iran governor on Sunday has urged the Majlis to approve provisions of the 2022-23 budget with minimal revenue deficit.
Ali Salehabadi said an unbalanced fiscal budget will undermine the CBI’s program in the coming year to control key macroeconomic variables, namely inflation.
“Controlling the monetary base, money supply and inflation is instrumental and the CBI has a comprehensive plan to realize this goal,” Salehabadi was quoted as saying by the CBI website.
Addressing the legislature, he said a budget with low deficit will help the CBI to better control key monetary factors.
In reviewing and okaying portions of the proposed budget so far, MPs have been criticized for making big changes in the initial draft.
Experts say such moves carry the risk of higher inflation as the lawmakers have apparently overestimated projected government revenue, increased its spending and imposed unwanted obligations on banks to lend cheap loans while disregarding their ability and resources.
Perennial budget deficits and the lack of sustainable resources to compensate deficit spending have pushed up inflation to unprecedented highs. As such, deficits inevitably cause money supply to expand and increase inflation.
The next fiscal budget calls for strange decrees to the central bank, which can and will result in high-powered money and money supply growth – as seen over the past years.
MPs have imposed an additional 10,000 trillion rials [$37 billion] in mandatory lending proposed earlier by the government on banks. They have so far been defiant and unresponsive to requests from senior government officials to reconsider legislation governing the lending policies of banks.
Observers say imposing new and heavier financial burden on banks already grappling with balance sheets issues either means that budgetary projections are not supposed to be realized or, if realized, will add to the banking problems.
The rise in mandatory lending is linked mainly to proposed increase in interest-free marriage loans given to newlyweds as well as employment lending particularly for low-income households and people in the less-privileged areas.
There are fears that overburdening banks with unsustainable financing commitment will hinder the CBI’s long-awaited efforts to improve bank balance sheets.
Due to years of flawed fiscal and monetary policies, the monetary base and money supply have grown to historic levels. CBI figures show that the monetary base grew 37.6% in the 12 months ending Dec. 31.
The growth was up 22.2% over nine months since the beginning of current fiscal year that ends on March 20 -- 6.7 percentage points higher compared to the corresponding period last year.
For years Iran has been grappling with some of the highest inflation rates in the world. According to latest data released by the Statistical Center of Iran, the average goods and services Consumer Price Index in the 12-month period to Jan. 20 jumped 42.4% compared to the same time the year before.
