Majlis Research Center, the powerful arm of parliament, has issued a warning about the next wave of inflationary pressure as a direct consequence of the exploding liquidity.
A new MRC report says the unprecedented increase in money supply in recent years, the steep fluctuations in the foreign exchange market plus jumps in consumer prices pose a severe challenge. For this and other reasons controlling liquidity, with the aim of curbing inflation, deserves high priority.
Liquidity jumped from 5 quadrillion rials ($44.6 billion) in mid-2013 and tripled to 16.7 quadrillion rials ($149.1 billion) by the end of Sept.
Mid-2013 marks the most recent explosion in inflation and the MRC says the current conditions could well lead to a recurrence in the coming months.
After mid-2013, the proportion of near money from total liquidity has increased at a regular pace. Average ratio of money to quasi-money during this period is 15%.
This composition plus money circulation remaining restricted due to high interest rates by banks, has so far kept inflation in check.
The Majlis report warns that if the current composition in liquidity reverses, i.e. the proportion of money overtakes near money, and liquidity circulation gathers speed “runaway” inflation would follow, whose signs were visible in the first half of the current fiscal.
According to MRC, the liquidity is spread much unequally and unevenly and the lion's share of deposits is parked with a few natural and legal entities. Therefore, the change in liquidity configuration and its concomitant inflation is “contingent upon the will of a small group of people.”
The think tank says that the above-mentioned issues and the prospects of higher inflation at a time when the new round of US sanctions take effect, highlight concerns that the next explosion of inflation fuelled by the huge liquidity may have in store.
Triple Scenario
MRC warned that the next round of inflation is likely to be perceived much more profoundly than in the past. It proposes three roadmaps to avoid higher inflation shock and offers practical measures.
The recommendations, which mainly take aim at the CBI as the main regulator of financial and monetary markets and the banking system, include managing new liquidity, curbing the existing liquidity and containing the bulk of liquidity.
A feasible measure to implement the first scenario and stop liquidity expansion is to set restrictions on banks’ balance sheets, particularly sick banks with impaired loans.
“The Central Bank of Iran may allow crisis-hit banks an increase of up to 10-15% of their balance sheets and set some limits on opening new accounts and lending capacities,” the report says.
According to the MRC, due to their money creation capacity, banks are more likely to embark on speculative (non-banking) activities to make profit, which the report recommends the banks be banned from. “This should be accompanied by effective monitoring of recipients of bank loans.”
Also, cutting interest rates on short-term deposits in the present conditions is an effective step in curbing liquidity growth, which the MRC says demands diligent CBI control to ensure banks uphold the law.
Curbing liquidity and slowing its pace is the second proposed scenario which seeks to control speculative activities and prevent the rush of liquidity into volatile markets such as forex, gold, real estate and the likes.
The proposed measures include closely monitoring large deposits and their transactions, opening deposit accounts with two-year maturity or more, shedding property owned by the government and depositing the earnings with banks with the aim of reducing liquidity. It also recommends levying taxes on capital gains and stabilizing the gold and currency market.
As per existing regulations, banks are not allowed to open investment deposit accounts with a maturity over one year. This is while long-term deposits are more durable and will be exposed to fines for withdrawal prior to maturity.
Regarding the third scenario, MRC suggest selling surplus property of banks and swapping non-performing loans with debtors' deposits in other banks.
“Doing so will not only help settle pending debts to banks but also help reduce liquidity volumes.”
