The imbalance of banks is among the main contributors to inflation in Iran’s economy. This imbalance is mainly formed as a result of the government’s financing methods and sets off the growth engines of inflation. In general, governments have two ways to make up for their budget deficits, either through reaching directly to the central bank and borrowing from the country’s monetary institution, or by taking out facilities and cash from banks and state-owned companies. Hadi Haqshenas, economist, prefaced his write-up for Persian daily Jahan-e Sanat with this note. Below is a translation of the text.
The funds provided by the banks to the government are obtained from borrowing and overdrawing from the central bank. Recent monetary data show that the amount of liquidity in the country has reached 61,030 trillion rials [more than $113 billion billion at current exchange rate]. One of the main roots of inflation is the imbalance of banks or the growth of their overdrafts from the central bank.
Government financing from banks to pay budget expenses is in actuality an indirect borrowing from the central bank. The move leads to the injection of strong money into the economic cycle and inflation.
If the government and the central bank seek to control inflation, it is necessary for them to block all the paths that lead to the growth of liquidity.
Controlling the growth of liquidity is only possible through reducing the imbalance of banks, controlling the budget deficit and establishing monetary and financial discipline.
In the meantime, the central bank should have such independence and authority that banks won’t have to borrow from it to reduce their liquidity risk.
Although the government’s encroachment on the banks’ resources is the main reason behind the increase in banks’ imbalances and their willingness to borrow from the central bank, if the central bank is capable of resisting the political pressures of the government and its endless demands, it will be possible to control the banks’ imbalances.
The fact is that the government mainly borrows from the central bank and banks to finance its operational expenses and development projects (which outweigh tax and oil revenues). That’s why the central bank should resist the financial demands of the government.
The level of resistance of the central bank depends on the degree of its legal independence; however it seems that in Iran, individuals determine the degree of independence of the institutions.
The independence of central bank will be preserved against marginal policies if it defends its goals, constitution and duties; the performance and political strategies of the central bank officials can guarantee the independence of the bank.
