Why do producers complain about shortage of bank facilities at conventional rates despite the growth in money supply?
Money supply grew by 34% over the year ending Oct. 22, increasing from 42,270 trillion rials ($107 billion) to 56,770 trillion rials ($143.72 billion). Overall banking credits of the non-governmental sector increased from 26,540 trillion rials to 36,850 trillion rials ($67.18 billion) during the same period, registering a 39% growth. Statistics show that money supply has grown by 34% and the credit balance to the non-governmental sector by 39%. So what is behind businesses’ shortage of money?
Ali Cheshomi, an economic analyst, prefaced his article for the Persian economic daily Donya-e-Eqtesad with this note. A translation of the rest of the text, where he responds to this question, follows:
The 50% inflation in Iran boosts the need for working capital financed by loans by more than 50%. Imagine a business with a working capital of 10 billion rials (for raw materials and salaries), 60% of which have been financed by loans. With a 50% inflation, the working capital increases to 15 billion rials.
Many businesses, especially those with limited resources and trade partners have no option but to take out loans. The business in question has to borrow 11 billion rials, i.e., 50 billion rials in new loans plus the old 60-billion-rial loan. As a result, the loan taken out by this business increases by 83%. However, this is not the end of the story.
When the real interest rate is negative, the economic prospect increases inflationary expectations and demand for bank credits. According to statistics, the year-on-year inflation of the month ending Oct. 22 stood at 48% and interbank interest rate was 21%, which means the real interest rate was -27%.
It is financially better for households and producers to buy durable goods on credit as soon as they can. In addition, the growth rate of the prices of housing, gold and foreign currency and even stocks has been higher than the inflation rate over the past two months. Thus, demand for loans to offset inflationary risks has increased.
Economic and financial uncertainties have also accelerated the pace of money transfer between markets and this itself becomes a source of instability.
Role of Pseudo-Money
Pseudo-money (time deposits) plays a bigger role in financing production than money (demand deposits). The policies pursued by the government and the central bank to control money supply in recent months have been based on the wrong proposition that banks are the source of money creation, and therefore they restricted bank lending in various ways.
From March 20 (the beginning of the Iranian year) to Oct. 22, demand deposits have grown by 31% and pseudo-money by only 14%. As a result, the share of money in money supply has increased by 2% while the share of pseudo-money has decreased by 2%.
Unfortunately, there is a wrong understanding of the nature of contributors to money supply growth in the government. Given the larger figure of pseudo-money, they believe that banks play a key role in money supply growth by taking deposits and lending, while the 34% growth in monetary base (high-powered money) by the central bank is the main driver of growth in money supply. Restricting the main banking processes only favors rent-seekers in getting credit lines.
The pressure of government borrowing onthe banking system is also noteworthy. Selling treasury bonds in the stock market and implementing open market operations are the right mechanisms to cushion the blow of inflation on the budget. But in recent months, the implementation of these policies has restricted banks’ resources.
According to a report by the Securities and Exchange Organization and the treasury, issuing bonds worth 1,050 trillion rials and selling 800 trillion rials of which since March 21 to Nov. 21 have brought the value of bonds to 4,370 trillion rials, indicating the huge volume of bonds limiting the resources available to the non-governmental sector.
The treasury’s report shows government debts reached 13,760 trillion rials and the debts of state companies hit 14,510 trillion rials by June 21, i.e., 28,270 trillion rials, which accounts for 40% of the country’s GDP. Although these are not debts to the banks, they do impact banking credits.
