New Budget Will Spawn Inflation

In a note on the CBI website, Abdolnasser Hemmati implicitly criticized the Majlis for padding the budget with rules that overburden the ailing banking system. 

"Figures approved in the budget include decrees to the central bank and the banking system, which ultimately could result in high-powered money and money supply growth," he warned. 

Controlling money supply and inflation is a pivotal goal of central bank, but the measures it takes to control inflation "is at odds with budgetary mandates and the plan to put an end to the recession," the senior banker said.

As one effort to curb the ever-expanding money supply, he pointed to the "intensified control" over balance sheets of banks. 

The budget was passed by parliament amid concern over inflated government revenue, unsustainability of income and mismanagement of government finances.  

On paper the budget has been conceived by the chamber in a way that demands colossal infusions of money apparently from the banking system.

For instance, the legislature has allowed specialized and commercial banks to extend credit worth $3 billion, either in rial or foreign currency, to pay for development plans and megaprojects. 

To encourage marriage and childbirth, it approved payment of home loans worth 3,600 trillion rials ($14.5b) to first-time homebuyers. 

In essence the much-debated marriage loan has been increased by at least 40% for year to 700 million rials per couple, which could double to 1 billion rials per couple if the bride is below 23 old and the groom under 25.

Banks are also required to offer interest-free loans worth 250 trillion rials ($1 billion) for creating jobs and self-employment. The list goes on and on making economic experts wonder how the fragile money and lending institutions can cope under the Majlis-mandated spending pressure. 

Mounting Pressure  

Banks have come under renewed pressure as they have to both realize budget targets and comply with the regulator’s mounting restrictions and transparency rules. 

In mid-December the Central Bank of Iran launched a plan to monitor the balance sheets of banks and credit institutions on a regular three-month intervals. 

Banks are often criticized for weak balance sheets, mismanagement and lending practices resulting in mountains of bad debt and their inability to recover large numbers of non-performing loans. The CBI insists controlling banks' balance sheets is instrumental in curbing the ballooning money supply.

Despite concerted efforts to control the money supply, it says, monetary indicators have grown in recent months "due mainly to inconsistent government budget structures and the unprecedented US sanctions.” 

Broad money supply reached 31,300.2 trillion ($125.2b) at the end of third quarter of the current fiscal year on Dec. 20, indicating 38.4% annualized growth.

CBI figures show this was 2.2 percentage points higher than the first half of the year ending Sept. 21. Money supply jumped 26.6% since the beginning of the current fiscal year in March when it was 24,721.5 trillion rials ($98.8b). 

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 of the current fiscal year indicating 29.7% annual growth. It was 15.5% higher since the beginning of the year to Dec. 20. 

Earlier this year, the CBI said it was setting the inflation target at around 22% for one year. However, soon after economists and academia rejected the target as a tall order, largely due to the speed at which consumer prices were rising, unprecedented devaluation of the rial and the steep decline in purchasing power. 

The average goods and services Consumer Price Index in the 12-month period ending Feb. 18, which marks the end of the 11th month of the current Iranian year, increased by 34.2% compared to the corresponding period last year, according to data released by the Statistical Center of Iran show. It had put the average annual inflation rate for the preceding Iranian month, which ended on Jan. 19, at 32.2%.