The monetary base shot up again in the eighth calendar month to November 22, though at lower pace the Central Bank of Iran reported.
It was near 7,276 trillion rials ($16.92 billion) -- up 20.5% in eight months since the beginning of fiscal year in March, but rose 34.6% in 12 months, which was down 1.2 percentage points from annualized growth of 35.8% in the same period last year.
The CBI released data on broad money, tagging it at 58,068 trillion rials ($135b) during the period -- up 20.2% in eight months.
On an annualized basis, broad money jumped 34.5% during the eight months to November 22, which was lower on the annual growth percentage in the first eight months last year at 42%.
The CBI said transfer of the general ledger of Mehr Eqtesad Bank to Bank Sepah related to the megamerger that started in 2019 explains the 2.7 percentage points of broad money growth in the seven-month period.
Rise in broad money due to the merging process “had no monetary and inflationary impact” because it was more related to statistical procedures than real increase in money supply, the regulator said.
Transferring bank ledgers was the final phase of the unprecedented bank merger that started in early 2019. It involved Bank Sepah, the oldest in Iran and one of the three still under government ownership, four banks and one credit institution owned by the Iranian armed forces, namely Ansar Bank, Bank Hekamat Iranian, Mehr Eqtesad Bank, Ghavamin Bank and Kosar Credit Institution.
The CBI says it has managed to control monetary factors by pushing for stricter financial discipline by banks and mitigating the impact of fiscal discipline, which is mainly related to how the government handles budget deficits.
Recent CBI measures include stringent credit policies, namely tighter restrictions on bank balance sheets, especially those of distressed banks.
Elaborating on the rising monetary base, the CBI singled out allocation of forex subsidies up until last year for importing food and medicine as key influential factors.
"Funding was for alleviating the impact of eliminating subsidized currency," the bank said. "These resources are to be repaid in rial and the monetary base is expected to decline in the near future," the regulator said without elaboration.
In May the Raisi administration put an end to the costly forex subsidy policy ($1=42,000 rials) for importing food and essential goods and instead started paying cash to eligible (low-income) recipients.
Senior economic officials say decline in the monetary base was partly due to the government borrowing less from the CBI in the form of discretionary spending in the first few months of fiscal 2022-23.
M1 Situation
CBI reported relatively higher growth in assets that can be readily cashed compared to less liquid assets.
Value of money, or M1, stood at 13,503 trillion rials ($31.4 billion), up 60.8% by the end of eighth calendar month to Nov 22. It jumped 36.9% in eight months since the beginning of the last fiscal year.
Quasi-money, or M2, which reflects less liquid assets grew at a slower pace to 44,565 trillion rials ($103.6 billion) -- up 28.2% y/y. It climbed 15.9% in eight months – a slower pace compared to M1.
M1 and M2 are the two components of broad money. The former refers to the most liquid assets that can be easily turned into cash. Cash is the highest liquidity asset because it can be traded easily and quickly without any effect on its market value.
M1 includes currency, demand deposits and other liquid deposits like savings. It is the most liquid portion of money supply because it contains currency and assets that either are or can be quickly converted into cash.
M2 or near-money, refers to less liquid assets that can be quickly exchanged for cash. Examples are bank certificates of deposit, treasury bills and long-term deposits.
According to the CBI, the role of M1 in money supply was near 23.3%, up from 20.4% in March. Likewise, M2 accounted for 76.7% of the total money supply compared to March.
M1 is seen as a key inflation-generating component of money supply and its increase means rise in inflation expectations. It also implies that savers are less inclined to put money for long in the bank.
Economists and financial observers link the unprecedented growth in M1 to the cash subsidy deposited into bank accounts of selected (needy) recipients after the government rewrote costly subsidy policies of the recent past.
According to the CBI, total value of banknotes and coins was 1,069.3 trillion rials ($2.48b) by Nov 22 – 28.5% higher on the same period last year. It was up 9.6% over eight months since March.
Money multiplier stood at 7.981, down 0.1% in eight months and 0.2% on the similar period last year. This indicates that with each rial created in the banking system, money supply increased by 7.981 rials.
