News website Banker defended the Central Bank of Iran’s management of the money market, saying the bank had fared well in its quest to curb inflation and the growth of money supply.
The bank recently came under fire when data showed broad liquidity continued its expansion in the first quarter of the current Iranian year—starting March 21.
Iran’s total money stock grew 4.4% during the quarter to 8.16 quadrillion rials ($247.47 billion at market exchange rate of 33,000 rials per dollar).
“Year-on-year money supply growth for the month ending June 21 dropped 5.4 percentage points to 27.2%,” the report said, citing central bank data.
The speed of the increase in broad liquidity has dropped sharply from a staggering 40.7% for the 12 months ending June 21, 2014.
The Drop in Inflation
“The inflation’s decline from nearly 40% in 2013 shows the bank’s success in utilizing its monetary tools in achieving financial discipline,” the website wrote.
Consumer prices rose about 15% year-on-year in June.
However, as economists say, all the credit in controlling inflation should not go to the central bank. The drop in inflation “was facilitated by a number of factors, including the appreciation of the Iranian rial, the decline in global prices for key staples, and the easing of international sanctions,” the World Bank wrote in a report.
Pierpaolo Benigno, a professor at LUISS Guido Carli and EIEF, outlined other reasons for the sharp decline in Consumer Price Index growth.
“It seems to me that the drop in inflation is not much because the central bank has been able to lower inflation. But because the conditions are not good, the economy is not doing well, a recession is prevailing, and sanctions have been partially eased. Low growth is obviously putting downward pressure on prices, independent of what the central bank does. Iran has low inflation with respect to what should be its potential inflation,” the professor told Financial Tribune.
Broad Approach
Yet all this is not to say the central bank has only been a bystander. The bank has been cleaning up the financial system. It has introduced state of the art electronic systems to monitor bank checks and foreign exchange trading.
Also, the bank has been running down uncertified financial institutions. Its efforts have borne fruit. Although many financial institutions are still operating out of the bank’s supervisory umbrella, it has brought many into the fold.
This has helped the bank expand its database on money supply. In its recent report, it added statistics from six banks and four credit institutions to its data set.
Revised Stats
But the change created a rift between the new money stock statistics and the old ones. The bank previously claimed money supply rose only 27.2% during the 12-month period, off by a long shot from the revised number of 40.7%. The 1350 basis point revision is due to covering new data available from the 10 companies the bank previously ignored or did not have access to.
This raised the question of whether the bank is doing its job properly. Banker says the data revision shows “the central bank’s move toward transparency and making real assessments of Iran’s money supply.”
The bank’s efforts are commendable; when you consider that it refused to issue economic growth and inflation data in the last year of the previous administration. A poor record is far better than an appalling one.
Heading in the Right Direction
The central bank has sought to alter the makeup of money supply’s expansion in its effort to contain inflation.
The bank’s monetary policy has been tightening the supply of cash—a dangerous fuel for inflation—while allowing for the expansion of lending and long-term investments—which have a lesser inflationary effect.
While broad liquidity grew 4.4% during the first quarter of the fiscal year, money base or hard cash in circulation, held with the central bank, only grew 0.4%. All the while, money multiplier rose 3.9% showing that most of the increase in money supply came from money created by commercial banks.
Perhaps critics are being too hard on the central bank officials. After all they are doing a far better job than their predecessors. But that is a low bar for anyone. Iran does not have a fully developed central bank, but it seems to be heading in the right direction.
