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Iran’s Economic Performance
Iran’s Economic Performance

Iran’s Economic Performance

Iran’s Economic Performance

In the first half of the current Iranian year 1395 (started March 20, 2016), the monetary base grew by 7.9% compared to the end of 1394 and by 20.4% compared with the same period of the previous year.
The main reason for this expansion is a 203.5% increase in the Central Bank of Iran’s net claims on the public sector, accounting for 15.9 percentage points of that growth, according to the Middle East Bank’s latest report on Iran’s economy.
The considerable increase in this component of the monetary base is the result of a 23.8% rise in CBI claims on the public sector and 23.6% drop of the public sector deposits with the CBI.
However, the CBI net claims on public companies and institutions is three times the CBI’s net claims on the government, which is attributed to the low amount of deposits of public companies and institutions with the CBI compared to the government’s deposits.
As the government budget deficit increased from the beginning of the second half of 1394, the increase in CBI claims on the public sector and the decline in public sector deposits with the CBI have accelerated.
The 16.9% increase in CBI claims on banks is the second source of the monetary base growth, accounting for 9.9 percentage points of its 20.4% growth in the 12-month period ending in 6/1395.
The main reason for this increase is the rise in CBI claims on public and non-public commercial banks and non-bank financial institutions. This originates in the rise in facilities extended to public and non-public sectors for financing small- and medium-sized enterprises at a time when the lending ability of banks and financial institutions is reduced severely.
Repeated increases in the interbank interest rate and banks’ competition to attract deposits by offering interest rates above those approved by the Money and Credit Council, especially in Q3 of 1395, point to the diminishing lending ability of banks, which is the result of delays in restructuring the banking system.
It should be noted that three sets of plans have been devised and legislated for restructuring the banking system, but the sluggish implementation of them has rendered them ineffective.
The increase in CBI’s net foreign assets by 5.1%, mainly due to the fall in CBI foreign debts, is the third cause of the monetary base growth, accounting for 6.5 percentage points of the 20.4% growth.
This indicates that the amendment to the Budget Law of 1395 in the first half of the year was not implemented, hence revaluation of CBI’s foreign assets, settlement of CBI claims on banks, settlement of banks claims on the government and the increase in government capital in state-owned banks from the revaluation of assets are not yet reflected in the balance sheet of the banking system.
Finally, the 12.5% increase in “others” component of the monetary base contributed -11.9 percentage point to the monetary base growth.
The M2 money multiplier reached 6.8% at the end of summer, showing a 7.1% increase from last summer.
An examination of the M2 money multiplier components in the period under review reveals that the rise in the ratio of notes and coins with the public to deposits, as well as the rise in the ratio of legal reserves to deposits, were factors leading to falls in M2 money multiplier while the fall in the ratio of excess reserves to total deposits was a factor in increasing it.
The balance of M2 liquidity at the end of summer increased by 28.6% compared to last summer and by 10.4% compared to the end of 1394, reaching 11,227.1 trillion rials as a result of the rise in monetary base and the M2 money multiplier.
An examination of the M2 components reveals that M1 and quasi-money rose by 25.4% and 29.1% by the end of the summer compared to the end of last summer, accounting for 3.4 and 25.2 percentage points of the liquidity growth rate, respectively.
During this period, cash and coins with the public rose by 7.4% and sight deposits rose by 31.7%, accounting for 1.9 and 23.5 percentage points of the M1 growth rate, respectively.
Sight deposits grew by 9.3% in Q2 of 1395, 3.6 percentage points higher than the rate in Q2 of 1394.
Quasi-money also rose by 5.6% in Q2 of 1395 which is higher than the 4.8% in Q1 of 1395 but still below the quarterly rates in 1393 and 1394.
These led to 13.2% and 86.6% M1 and quasi-money share of liquidity at the end of Q2 of 1395, respectively.
The discretionary decrease in interest rates on time deposits accelerated the conversion of time deposits to sight deposits.
Besides, the narrower profit margin originated from the discretionary reduction of lending rates has intensified banks’ competition for attracting deposits by offering higher interest rates. This may result in a gradual slowdown in conversion of time deposits to sight deposits.
However, higher fluctuations in parallel markets in recent months may exacerbate the instability of the banking system due to increasing conversion of time deposits to sight deposits.
Under the circumstances, existing problems in the banking system will continue to frustrate efforts aimed at reducing real deposit rates and thereby stimulating consumption and investment.
The balance of extended facilities by the banking system at the end of the first half of the year rose by 25.3%, registering the highest point-to-point growth rate in the period. Part of this rise is attributed to the considerable increase in the balance of facilities in 6/1395.
In the same period, the balance of deposits and deposits after deduction of legal reserves rose by 25.2% and 26.6%, respectively. Therefore, the ratio of facilities to deposits (after the deduction of legal reserves) reversed its falling trend from the beginning of Q2 of 1395 and reached 85.9% at the end of that quarter. This ratio was 82.1% in Q1 of 1395.
According to CBI, during the first half of the year, 2,328.8 trillion rials of facilities were extended to various economic sectors, which was 45.4% higher than in the same period of last year.
However, as no breakdown of the new extended facilities and the rolled-over ones are available, an increase or decrease in the lending ability of banks cannot be inferred.
Extended facilities aimed at financing working capital and private consumption had the highest value share of the total extended facilities at 65.6% and 10%, respectively.
The main recipients of the extended facilities were “services” with 41.3%, followed by “manufacturing and mining” with 28% of the total.

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