Liquidity Dilemma Linked to Bank Balance Sheets

The volume of liquidity has been constantly on the rise in the Iranian economy for years, prompting many pundits to refer to it as a ticking time-bomb that, if not defused, will eventually create the next economic crisis.

However, the liquidity surge has yet to take center-stage, as the economy continues to grapple with another significant hurdle related to it.

Even as the liquidity keeps on rising without showing any signs of abating or slowing, businesses find themselves bereft of cash, an issue that has come to be known as the "liquidity enigma" in Iran.

So why do private sector businesses and small- and medium-sized enterprises that drive the economy are increasingly dependent on any fund mustered up by the embattled banking system while seemingly there is more than enough cash to go around?

The answer can be sought in the balance sheets of banks and credit institutions, but before that, let us take a look at just how severe the liquidity surge has been.

According to data compiled by the Institute for Trade Studies and Research affiliated with the Ministry of Industries, Mines and Agriculture from the archives of the Central Bank of Iran, in a 15-year period beginning from the turn of the millennium, liquidity has annually grown by an average of 27.8%.

That is while between 2011 and 2016, the ratio of liquidity to nominal GDP has been vastly increasing and has almost doubled. In 2011, the ratio stood at 65% and unfailingly rose to a respective 68.5%, 72.4%, 91.4% and 125.6% in the following years.

What is more, the most recent data published by the central bank indicate that up to the end of the third Iranian month of the current fiscal year on June 21, the total volume of liquidity stood at 13.15 quadrillion rials ($346 billion), registering a 24.1% year-on-year rise compared with the same month of last year.

That is while the number signified a decrease compared with the corresponding period of two years ago because at the time, the money supply had grown by 29.7% YOY.

In the month to June 21, a total of 11.5 quadrillion rials ($302.6 billion) worth of quasi-money existed in the nation, which is telling of a 24.6% increase compared with the same month of last year while the year before, it had grown by 31.1%.

Balance Sheet Syndrome

Moving on to the consolidated balance sheets of lenders, which hold the key to the ever-growing dilemma, the latest sheets of six months ago reviewed by the ministry's research center show that deposits made by the private sector, including people and businesses, make up the majority of banks' resources while loans and foreign exchange deposits are the runner-up and debts to the CBI round up the resources.

On the other hand, loans allocated to the private sector are the main component of the assets held by the banks and credit institutions. Other assets, foreign assets, government debts and deposits made with the CBI constitute the rest of their assets.

The think-tank notes that from 2011 to 2016, the ratio of lenders' non-government liabilities to the deposits made by that sector has steadily and meaningfully decreased from 96.8% to 76.1%.

For instance, in 2011, lenders reimbursed about 52% of their debts from non-government deposits and 51% of their assets were paid out in the form of loans to the non-government sector.

In contrast, just five years later, about 58% of their debts were disbursed from deposits from non-government sources while only 44% of their assets were allocated as loans to the private sector.

In the five-year period, the share of debts held by the private sector and "other debts" in the portfolio of banks decreased and increased by 54% to 44% and 18% to 30% respectively. This clearly shows that funds used by the private sector, which will subsequently entail debts, are decreasing while other debts, which are less liable to become liquid assets, are surging.

The declining ratio of non-government sector debts to non-government sector deposits indicates that lenders are weakening in terms of loan and credit allocation to the private sector and as outlined by the Institute for Trade Studies and Research, one of the reasons behind this is that "the formation of deposits has changed from long-term to short-term".

These findings call for an appraisal of the debts and assets held by lenders.

This is part of the significant changes many businessmen in the private sector and CEOs in the banks surely look forward to, incorporated in the twin bills devised by the administration and sent to the parliament with the ultimate aim of implementing major reforms in the banking system that has largely remained unchanged in the past four decades.