The Governor of Central Bank of Iran Ali Salehabadi says the government has undertaken major reforms to improve the banking sector.
The reforms concentrate on controlling influential factors in expanding money supply and the monetary base, the government’s borrowing from the CBI, bank debts to the CBI, foreign assets of the central bank and bonds issued by the government to cover its deficits, he told state TV.
“The central banks has devised structures to address and remove the flaws,” he was quoted as saying by the CBI website.
Salehabadi summarized the main components of reforms into three areas: restructuring the government’s ties to the CBI and banks, CBI interaction with lenders and the banks’ relations with customers.
Exercising control over bank balance sheets seems to be of paramount importance in the reform plan. “It is a key measure initiated by the CBI,” the senior banker said.
“By doing so, the regulator will be able to tame money supply growth and determine how much any given bank can expand assets in its books.”
Monetary experts say explosion of broad money is partly linked to balance sheets of banks. In line with measures to bring financial discipline to the ailing banking industry, the central bank has tightened restrictions on dysfunctional banks to be able to “control money issuance” by them.
As per the CBI plan of action to control weak balance sheets of lenders, the monthly growth of specialized lenders’ assets must not exceed 2.5%. Likewise, commercial banks are not allowed to increase assets beyond 2%.
According to regulations of the Money and Credit Council, the top monetary and policymaking body, the assets shown in the balance sheets of banks are monitored at regular three-month intervals.
Supervision over bank assets does not necessarily include all items in balance sheets. However, the regulator is sensitive toward increase in balance sheets resulting from investment in non-banking activities, increase in their expenses, expanding branches and buying fixed assets.
The regulator says it welcomes increase in balance sheets resulting from capital rise, purchasing government bonds, cash reserves and the likes.
Exemption of the latter items is because they have little or no impact on the money multiplier, which measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
Economists and experts say controlling bank balance sheets significantly reduces the money multiplier, and by extension, curbs the expansion of broad money.
Expressing Optimism
The CBI boss said he is guardedly optimistic about improvement of key monetary factors, namely broad money and the monetary base.
“Both the monetary base and money supply will be in a better condition this year. This can and will be done by reducing government debt to the CBI”.
Elaborating this point, he said, “Government debt to the CBI will decline if its foreign exchange revenue increases. Indeed we hope the government will settle its arrears to the CBI by improving its forex revenue.” He did not provide details on the government debt which is believed to be in billions of dollars.
The banker added that the central bank works in collaboration with the Planning and Budget Organization and the Economy Ministry to ensure fiscal discipline and control the impact of the high and rising budget deficits.
Budget deficits inevitably cause money supply to expand and increase inflation. Recent CBI data show broad money supply increased 39% y/y to March 20, marking the end of fiscal year, to reach 48,324.4 trillion rials ($161 billion).
The monetary base reached 6,280 trillion rials ($21 billion) by March 20 – up 31.4% over the same period.
Analysts say the steep increase in government and bank debts to the central bank and rise in the CBI’s foreign assets (inaccessible due to the US sanctions) are the main reasons behind expansion of monetary base.
