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Factors Behind Rise in Iran’s Monetary Base

Factors Behind Rise in Iran’s Monetary Base
Factors Behind Rise in Iran’s Monetary Base

The monetary base in Iran grew by 17.3% by Jan. 2017 to reach 1,722.3 trillion rials, which is 3.2 percentage points lower than its growth rate in 2015-16.

In its latest quarterly report, the Middle East Bank has reviewed the rise of monetary base in Iran in the fiscal March 216-17 and its contributing causes. The following is the full text of the report’s section on “Monetary and Credit Aggregates”:

The 30.5% rise in the Central Bank of Iran’s claims on banks is the main factor behind the rise in monetary base, which itself is attributed to the 172.0% increase in CBI claims on non-state banks and non-bank financial institutions.

As a result, the share of CBI’s claims on non-state banks and non-bank financial institutions rose to 31.3%, while the share of specialized banks dropped to 54.5%. The increase in CBI claims and the competition to attract depositors by offering higher interest rates, especially from Oct. 22, 2016, onwards, indicate that the cash flow problem of the banking system has exacerbated.

The 5.0% rise in CBI’s net foreign assets is the second main reason for the growth of monetary base, accounting for 6.1 percentage points of its growth. Table 1 exhibits monetary base components from Q1 of 2015-16 to Q3 of 2016-17 and the Iranian month starting Dec. 21, 2016.

The third main reason for the rise in monetary base was a 31.8% increase in net CBI claims on public sector, accounting for 3.8 percentage points of the overall monetary base growth. This 31.8% growth is mostly due to the positive CBI net claims on public sector, i.e., a 27.0% rise in CBI claims on public sector and a 0.6% rise in government deposits with the CBI.

In contrast, CBI net claims on state-owned companies decreased by 6.2%. By Jan. 19, 2017, CBI net claims on state-owned companies accounted for 95.1% of CBI net claims on public sector.

According to CBI authorities, government expenditures through CBI’s revolving fund is the main reason for the rise in CBI claims on public sector. The law permits the government to receive up to 3% of its general budget from CBI as revolving fund, provided that the government settles it by the end of the financial year. However, the end of year balance of CBI claims on the public sector has continuously increased in recent years.

Therefore, either the revolving fund has not been completely settled or a proportion of the government debt is due to the purchase of government bonds (sukuk) by CBI. Eventually, the “Others” component of the monetary base by a 10.9% increase contributed -9.9% to the monetary base growth.

The M2 money multiplier increased by 0.5 point to reach 6.9 by Jan. 19, 2017. In this period, the fall in the ratio of notes and coins in circulation to deposits and the ratio of excess reserves to deposits were factors that increased the M2 money multiplier, while the rise in the ratio of legal reserves to deposits was a factor in decreasing it.

The liquidity (M2) rose by 26.0% by Jan. 19, 2017, and reached 11,966.0 trillion rials, helped by the rise in monetary base and M2 money multiplier. Among liquidity components, money (M1) and quasi-money grew by 27.8% and 25.8%, respectively, accounting for 3.5 and 22.6 percentage points of the liquidity growth.

Notes and coins in circulation and sight deposits rose by 8.8% and 34.3% in this period, respectively, accounting for 2.2 and 25.6 percentage points in money (M1) growth.

The growth rate of sight deposits in Q3 of 2016-17 was higher than in Q3 of 2015-16, but considerably lower than the growth rates in the preceding three quarters.

Besides, the quarterly growth rate of quasi-money in the first three quarters of 2016-17 has dropped compared to the rates in the same quarters of 2015-16. In the Iranian month starting Dec. 21, 2016, the share of quasi-money in liquidity rose compared to its preceding month. As a result, in this month, the share of money and quasi-money in liquidity reached 12.6% and 87.4%, respectively.

Table 2 shows M2 money multiplier and liquidity components from Q1 of 2015-16 to Q3 of 2016-17 and in the month starting Dec. 21, 2016.

The balance of extended facilities by the banking system rose by 26.0% by Dec. 20, 2016.

Also, the balance of deposits before and after the deduction of legal reserves rose by 24.4% and 26%, respectively. Hence, the ratio of facilities to deposits (after deduction of legal reserves) remained unchanged at 84.7%. The ratio of legal reserves to deposits in Q3 of 2016-17 averaged 9.5%, indicating a 1.6 percentage points increase.

According to CBI, facilities worth 4,775.8 trillion rials were extended to applicants in the first 11 months of the fiscal 2016-17, showing a 37.1% rise.

Extended facilities aimed at financing working capital accounted for 63.7% of all facilities while 81.8% of the facilities pertained to the “Industries and Mining” sector, which was the main recipient of extended facilities for working capital with 37.6%. “Services” sector received 33.4% while “Commerce” sector accounted for 15.0%.

Extended facilities aimed at financing plans with 9.9% share ranked second in total extended facilities, in which “Services” accounts for the highest value share. “Services” also accounts for the highest share in facilities aimed at financing development plans and private consumption.

As expected, the “Housing and Construction” sector had the highest share of facilities extended for mortgages and reconstruction.

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