Central Bank of Iran says the overexpansion of monetary variables is largely due to ingrained defects in the structure of economy.
The public relations department of the bank published a note in response to critics of CBI’s performance with regard to efforts, or the lack of, to control money supply.
News outlets in recent weeks said the money supply had doubled in three years and leveled criticism, in particular, against the CBI Governor Abdolnasser Hemmati who took office in the summer 2018.
"Due to structural flaws, average money supply growth was 27.6% in the past 20 years," the public relations office said in a Twitter note.
"Simple arithmetic tells us that the money supply will double every three years irrespective of who is at the helm of the monetary policymaking establishment.”
Money supply reached unseen levels in the recent past due mainly to the US economic blockade, growing government budget deficits and Covid-monetary policies.
The tough US sanctions took a heavy toll on crude oil export, the lifeblood of Iran's economy. The absence of sustainable revenues and steep decline in oil revenue in two years has led to persistent deficit spending.
Broad money supply reached 31,300.2 trillion ($125 billion) at the end of third quarter of the current fiscal year on Dec. 20 or 38.4% annualized growth.
Likewise, the monetary base jumped from 3,142.6 trillion rials at the end of Q3 last year to 4,075.4 trillion rials ($16.3b) in the first nine months indicating 29.7% annual growth.
50-Year Pattern
The monetary system has recorded some of the most staggering figures in money supply expansion. Money supply expanded exponentially over the past 50 years. Records say money supply growth on average was 16.9% in the 1960s, 30% in the 1970s, 18.4% in the 1980s and 26.7% in the 2000s (end of March 2020).
Accordingly, the highest annual growth was in fiscal 1974-75 at 57% followed by 2006-07 at 39% and 38% in 1995-96.
The CBI said last week that by "curbing over-borrowing and selling bonds", it managed to keep the monetary base in check in the month ending Feb.18 as its growth rate was unchanged compared to the same month last year.
Without providing figures, the CBI said last week that money supply and monetary base rose 23.6% and 33.8% by end of the month to Feb. 18 in the course of eleven months since the beginning of fiscal year last March.
"However, special conditions arising from the pandemic and the need to support economic activity caused the money supply to grow higher than last year," the CBI said.
As to what has led to the colossal money supply, the CBI earlier blamed multiple factors, namely the government’s over-borrowing from the CBI and the National Development Fund of Iran (sovereign wealth fund), even when the NDFI’s forex funds were inaccessible due to the US economic penalties.
In response to government requests to borrow from the NDFI to fight natural disasters and the coronavirus plague, the CBI has no choice but to keep paying the rial equivalent of money the government borrows from the fund.
The procedure is said to be the main reason behind the expansion of money supply as the CBI should print money for rial payment until the NDFI’s blocked foreign assets are freed.
Earlier last year, an estimated 750 trillion rials ($3b) was injected into the economy to help struggling businesses impacted by the deadly virus.
The loans were partly secured via legal reserves of banks, causing the CBI to temporarily cut reserve requirement of banks. In November the CBI restored the reserve requirement ratio to 10-13%.
