Data released by the Central Bank of Iran show the growth rate of key monetary factors, namely broad money and monetary base, has seen slow but steady decline.
Broad money stood at 46,240.3 trillion rials ($171 billion) in the Iranian month ending Feb. 19, showing 39.7% growth in the 12-month period.
The figures indicate four straight decline of broad money growth in the monthly monetary reports. It was down from the annualized growth of 42% recorded for month ending Nov. 21. This dropped to 41.4% and 39.8% in subsequent months.
According to CBI data, broad money expanded by 33% during the first eleven months of the last fiscal year that ended on March 20.
The monetary base surged 33.2% in 12 months to Feb. 19, recording an annualized rise that was 2.3 percentage points lower than the registered growth in the similar timespan a month before.
The annual monetary growth was 35.8% in the month to Nov. 21. It rose 26.6% in the course of 11 months since the beginning of fiscal year.
The main reason behind expansion of the monetary base was the steep increase in bank debt to the CBI and rise in CBI foreign assets.
Bank debt to the CBI contributed to 15.3 percentage points of monetary base growth and rise in the CBI’s foreign assets accounted for 23.3 percentage points.
Increase in bank foreign assets is said to be the main driver of expanding money supply in the past few months. Most assets owned by the CBI and banks are blocked overseas and are not accessible due to the 2018 US sanctions.
The CBI earlier said that banks are facing shortage of liquidity in the interbank market, making them more reliant on CBI funds. Lenders’ credit crunch is related to ballooning deficit in the government budget.
As a matter of policy, the CBI has regularly implemented open market operations to control money supply in the interbank market and navigate interbank interest rates around the regulator’s target.
The regulator says it has managed to partly mitigate the detrimental impact of the monetary base expansion emanating from government over-borrowing by regularly implementing the OMOs.
Money Multiplier
The CBI reported that the money multiplier stood at 7.962, increasing 4.9% on the figure in the corresponding period last year and up 5.1 % in the course of 11 months.
Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
Citing principles of monetary economics, experts say when increase in money supply is caused by the 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.
Money and Near Money
As for the components of money supply, the CBI said money (M1) was 9,162.4 trillion rials ($33 billion), up 40.5% in the 12 months to Feb. 19, indicting a decline in momentum compared to the 49.8% growth recorded in the 12 months ending March 20. M1 annual growth was higher than 39.2% rise reported in the preceding month.
M1 is composed of physical currency and coins, demand deposits, traveler checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts. It includes the most liquid portions of money supply because it contains currency and assets that either are or can be quickly converted to cash.
On the flip side, near money (M2) stood at 37,077.9 trillion rials ($137b), increasing 39.5% y/y and up 33.1% in 11 months.
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.
M1 is seen as a key inflation-generating component of money supply. Monetary experts say higher M1 growth could be a sign of the rise in inflation expectations.
The role of M1 in broad money supply stood at 19.8% while M2 accounted for 80.2% of the total money supply.
Total value of banknotes and coins circulating among the people was 752.1 trillion rials ($2.7b) by Feb. 19 – up 15.4% on the same period last year. The figure was 2.3% higher over 11 months since the beginning of the fiscal year.
