Iran’s Economy Benefits from
the Liquidity Volume?
By Mahdi Goodarzi & Mojde Rezaee
The 11th Iranian government took office aimed at curbing the inflation rate and boosting economic growth, for which controlling and managing the liquidity volume is a pre-requisite.
Historically investigating liquidity growth in the country proves that nearly all governments have experienced such growth, mostly due to the rise in base money other than the money multiplier; the former is mostly made up of “the Central Bank of Iran’s (CBI) foreign reserves”, “the government and state-run sector’s net debt to the CBI” plus “banks’ net debt to the CBI”.
Although calculated with different base years, average economic growth has approximately been 4% over 1997-2016; besides, the private sector/people purchase power has annually grown by 3.25%.
Considering the diagram above, the liquidity volume has reached from IRR 134,280 bn ($28.09 bn) in 1997 to IRR 13,000,000 bn ($345.74 bn) in 2016, registering a 96 times growth (a 12 times growth in dollar); in other words, this volume has gone through an annual 26% growth on average. Such a surge in the liquidity volume is now being interpreted as a crisis, threatening the inflation management, as a great accomplishment in President Rouhani’s first tenure.
It is worth noting that the inflation rate has still not adopted an upward trend following the rise in the liquidity volume over the past 4 years; the reason behind it, as experts believe, is that resources are still locked in non-productive areas and the recession still dominating the economy has turned their inflationary effect intangible in the country.
Why Liquidity Grew?
On the reasons of this growth, the former Governor of the Central Bank of Iran, Dr. Tahmasb Mazaheri, says: “the liquidity volume grew from IRR 700,000 bn at the beginning of the 9th administration to IRR 3,000,000 bn at the end of the 10th administration, followed by negative production and economic growth indices and eventually, high inflation rate. Despite managing the liquidity volume by Dr. Rouhani’s first administration, largely arising from less reliance on the CBI’s resources, the government was still in need of such resources”.
He, then, refers to the non-consideration of liquidity held by unregulated and illegal credit institutes, which was added in 2014-15, increasing the liquidity by IRR 900,000 bn; this figure stood at IRR 6,000,000 bn at the beginning of President Rouhani’s administration.
Monetary and banking experts mention banks’ arrears as another factor increasing the liquidity volume, because of not having access to trading instruments like LCs.
A part of this growth also originates from the government’s pressure on private banks to grant loans to economic enterprises, having added to the government and banks’ debt to the CBI.
In this regard, Mr. Tayyebnia, the Minister of Economy and Financial Affairs states: “during 2014, the government focused on providing enterprises with working capitals to boost their performance, contributing to higher levels of production, along with plans to grant loans to the public, compensating the loss in their purchase power over 2015”.
Stressing on the balanced combination of liquidity in the past 4 years, he added: “the growth in base money was the major contributor to liquidity and inflation growth in the previous administration’s tenure such that its growth rate reached 27.6% and its figure hit IRR 560,000 bn, reaching the point to point inflation rate to around 40% in 2013. Rouhani’s administration, however, managed to drag the point to point and average inflation rates down to below 7% and 10% resorting to liquidity and base money management. In fact, during this period, the base money reached from IRR 970,000 bn to IRR 1,800,000 bn which seemed to be reasonable considering the money multiplier reaching from 4.7 to 7; this demonstrates banks’ more reliance on their own resources”.
It is worth mentioning that the “working capital to banks’ total facilities” ratio increased from 46% in 2012 to 64% in 2016; furthermore, the retail facilities granted, including Qarz al-Hasane and marriage loans, posted annual growth as well.
In addition to what has already been said, the CBI also repeatedly forced banks to grant facilities to “Small to Medium Sized Enterprises”, even those not qualified. Statistics show that over 2012-2016, around 24,000 SMEs received facilities worth IRR 170,000 bn; in fact, the government intended to boost production via injecting money through banking channels and avoiding the growth in base money. This is indeed the dilemma ahead the government:
On one hand, it attempts to avoid borrowing money from the CBI concerned about raising the base money and adding fuel to the fire of inflation.
On the other hand, it intends to assign the role of funds allocation to banks; but which banks? Those which are trapped with credit crunch? Those which prefer to pay the collected funds to the CBI to clear their debt or to early depositors as their return? In fact, this is the matter facing the government with credit crunch. While the liquidity volume has grown in the country, banks are still not able to transfer the funds to the real parts of the economy. How is it possible that a country is replete with liquidity but simultaneously suffers from credit crunch?
Although taking the correct path to tackle recession, the government seems to hit the huge barrier of problematic banks unable to help, which necessitates the its attention to them in the first place to allow the implementation of monetary policies.
Being all said, it is worth reminding that liquidity growth does not raise concerns on its own if, albeit, accompanied by production and economic prosperity, which will neutralize the caused inflationary effects in the mid-term. Considering the average 4% economic growth in the country with the 7.6 times, 96 times and 21 times growth in dollar price, liquidity figure and inflation ratio, respectively, over the past 20 years, we are in dire need of structural reforms and improvement of macroeconomic indices in Iran’s economy, which demands more attention to liquidity as one of its major drivers.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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