Economy, Business And Markets

CBI Disciplinary Measures to Help Exit Recession

CBI Disciplinary Measures to Help Exit RecessionCBI Disciplinary Measures to Help Exit Recession

The Central Bank of Iran has taken a “disciplinary” approach, rather than a contractionary one, to help the government curb inflation, and provide for an exit from recession at the same time, a deputy of economic affairs of the CBI told FNA on Wednesday.

“As a result of the disciplinary approaches and policies adopted by the central bank, signals indicate the country is now on the way to exit recession,” said Peyman Ghorbani.

 The central bank has been mainly focused on controlling the growth of money supply, and exit leading money flow to production channels, Ghorbani said, explaining that the CBI has decided to allocate 60 percent of the banking system’s loans to fund industries.

Of a total 1.7 quadrillion rials ($66 billion) of loans paid by the banking system in the first seven months of the current Iranian year, 60.2 percent have been given to manufacturing industries, Ghorbani said.

 Sources of Liquidity Growth  

The increase in money supply can stem from either monetary base or money multiplier, Ghorbani said.

Monetary base is the total amount of a currency that is either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves. Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.

When the increase in money supply is caused by money multiplier, it shows that banks are doing well in the process of taking deposits and giving out loans, he said; which is an indication of improvement in the overall efficiency of banks as financial intermediaries.  

However, he stated that when the increase in liquidity stems from monetary base – assuming the foreign assets owned by the central bank in current situation are fixed – it is an indication that the government is counting on the resources of the central bank. This can also suggest that the country’s banking network is under pressure from quasi-budget plans like Maskan Mehr – an unsuccessful housing project launched by the former government—or that banks are obliged to pay loans with low interest rates beyond their ability, which again makes them dependent on the resources of the central bank. This was also a usual practice of the previous government to force the banks to grant low interest loans upon the government’s wish.

“The CBI prefers that the growth in the liquidity is derived from money multiplier rather than monetary base,” he said.

 Latest Statistics

The total volume of liquidity in the seventh month of in the current Iranian year (Sept. 23, Oct. 22) increased to 6.6 quadrillion rials ($246 billion), showing a 11.2 percent increase compared to the last fiscal year, according to the CBI official.  

In the same period, he said, monetary base decreased by 2.1 percent, reaching 1.1 quadrillion rials.

For the same month, money multiplier reached 5.877, showing a 13.6 percent increase compared to the last month of the previous year, Ghorbani said.