Data released by the Central Bank of Iran show higher growth in assets in the financial system that can be readily changed into cash, compared with growth of less liquid assets.
Value of money, or M1, stood at 11,820 trillion rials ($39.4 billion), up 57.6% by end of fourth calendar month to July 22. It rose 19.8% in four months since the beginning of fiscal year in late March.
This is while quasi-money, or M2, which reflects less liquid assets, grew at a slower rate. M2 was 40,681.4 trillion rials ($135.6b), increasing 32.5% annually. It climbed 5.8% in the first four months – a slower pace compared with M2.
M1 and M2 are the two components broad money. The former refers to the most liquid assets that can be easily turned into cash. Cash is the highest liquidity asset because it can be traded easily and quickly without any effect on its market value.
M1 is composed of currency, demand deposits, other liquid deposits including savings. It is the most liquid portions of money supply because it contains currency and assets that either are or can be quickly converted to cash.
M2 or near-money, refers to less liquid assets that can be quickly exchanged for cash. Examples are bank certificates of deposit, treasury bills and long-term deposits.
According to the CBI, the contribution of M1 to money supply stood at 22.5%, up from 20.4% in March. Likewise, M2 accounted for 77.5% of the total money supply, declining 1.9 percentage points compared to March.
M1 is seen as a key inflation-generating component of money supply and its increase means rise in inflation expectations. It also means that savers are less inclined to put money in the bank as long-term deposits.
Monetary experts link the unprecedented growth in M1 to the cash subsidy deposited into the bank accounts of selected (needy) recipients after the government launched subsidy reforms.
In May the Raisi administration put an end to costly and controversial forex subsidies given to importers of essential goods and started paying cash to eligible recipients, namely the underprivileged hit by the high and rising cost-of-living.
According to CBI data, total value of banknotes and coins circulating among the people was 885 trillion rials ($2.9b) by July 22, 22.6% higher on the same period last year. It was up 2.4% over four months since the beginning of the fiscal year.
Key Monetary Data
The CBI said broad money and the monetary base continued to decline in the calendar month to July 22. Broad money stood at 52,501.4 trillion rials ($181 billion) in the said period, up 8.6% in four months, but 1.3 percentage points lower on the same period last year.
On annualized basis, broad money increased 37.4%, which was 2.5 percentage points lower than the first four months of last year.
Likewise, the monetary base stood at 6,530.3 trillion rials ($22.5 billion) in the same time, rising 8.1% in the course of four months.
The regulator said the growth has tamped down as the monetary base expanded 12.8% in the first four months of the last fiscal year. It rose 26.2% in 12 months, down 1.6 percentage points from the annualized growth of 27.8% in the month before.
Money multiplier stood at 8.040, up 0.5% in the course of four months and 8.9% higher on the similar period last year. This indicates that with each rial created in the banking system, money supply increased by 8.040 rials.
Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
