Broad money supply reached 34,761.7 trillion ($151 billion) at the end of the previous fiscal year on March 20, indicating 40.6% growth compared with a year earlier.
Money supply increased 10,040 trillion rials ($43.6b) over course of a year, rising from 24,721.5 trillion rials ($107.4b) in March 2020, according to the data released by the Central Bank of Iran.
As for the main components of money supply, the share of money (M1) stood at 6,909.6 trillion rials ($30b) by March 20, up 61.7% on a year-on-year basis.
The total value of banknotes and coins in circulation was 735 trillion rials ($3.2b) in this period, indicating a 20.2% increase compared to the year before.
Quasi-money (M2) grew at a slower pace compared to M1 and was over 27,852.1 trillion rials ($121b) to post 36.2% growth on an annualized basis.
M1 is composed of physical currency and coins, demand deposits, travelers' checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts. M2, also called near-money, refers to less liquid assets that can be quickly exchanged for cash. Examples are bank certificates of deposit and treasury bills.
The contribution of M1 to money supply increased from 17.3% in March 2020 to 19.9% in March 2021. Similarly, the share of M2 declined from 82.7% to 80.1% in the mentioned period.
Strained Budget
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 the steep decline in oil revenue in two years has led to persistent deficit spending.
An increase in money supply can be a function of either the monetary base or the money multiplier. The monetary base jumped from 3,528.5 trillion rials ($15.3b) in March 2020 to 4,559.5 trillion rials ($19.8b) in March 2021, indicating 29.2% annual growth. It was, however, 3.6 percentage points lower than money base growth a year before.
The CBI data suggest that an increase in foreign assets has been the main driver of growth in the monetary base. The net value of CBI foreign assets was 4,427.2 trillion rials ($19.2b) by March 20, up 27.4% annually and contributing to 27% of the monetary growth last year.
Money multiplier reached 7.624 points at the end of last year, which is 8.8% higher compared to a year earlier. This means that with each rial created by the CBI money supply increase by 7.62 rials.
Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
Monetary economists opine that when increase in money supply is caused by money multiplier, it shows that banks are doing well in the process of taking deposits and giving loans. However, when increase in “ballooning money supply” stems from the monetary base, it indicates that the government is counting on the resources of the central bank.
As to what has led to the colossal money supply, the CBI has pointed to the government’s over-borrowing from the CBI and the National Development Fund of Iran (sovereign wealth fund), when the NDFI’s currency assets were inaccessible due to the US economic penalties.
