Growth in Monetary Base Linked to Mounting Bank Debts to CBI
EghtesadOnline: New monetary data show growth in the monetary base is driven more by bank debts to the Central Bank of Iran and less by CBI’s foreign debts.
The total debt of banks to the CBI was 1,859.7 trillion rials ($6.8 billion) by end of the calendar month to Feb.19.
Data seen on the CBI website show a shift with regard to key factors influencing expansion of the monetary base.
The monetary base stood at 5,807.5 trillion rials ($21.5 trillion)– up 33.2% in 12 months to Feb.19. It rose 26.6% over 11 months.
While the CBI’s foreign debt was paramount in expanding the monetary base in most previous monetary reports, the latest data suggest that it is fueled by the rising debt of banks to the CBI.
Bank debt to the CBI contributed to 15 percentage points of monetary base growth in 11 months while rise in CBI foreign assets accounted for 7.7 percentage points.
Other data carried by the domestic media show that increase in bank debt to the CBI accounted for 690 trillion rials ($2.5 billion) to the monetary growth. This is while contribution of CBI foreign debt was 350 trillion rials ($1.3 billion).
In the same vein, net foreign debt of the CBI rose 7.7% in 11 months while lenders’ arrears to the regulator increased 58.8% in the same period.
The CBI earlier said that banks are facing shortage of liquidity in the interbank market, making them more reliant on the CBI for funds. Banks’ credit crunch is largely the function of the deepening deficits in the government(s) budget.
To control the situation, the CBI has regularly implemented open market operation to manage money supply in the interbank market and navigate interbank interest rates around the regulator’s target.
The regulator says it has managed to partly mitigate the detrimental impact of monetary base expansion emanating from government’s over-borrowing by regularly implementing the OMOs.
Shortage of liquidity in banks is linked to the exploding government budget deficits and obligations imposed by it on banks to lend to help stimulate the economy.
Censuring the mounting pressure on banks to lend, former CBI governor Abdolnasser Hemmati described the practice as “indirect borrowing by the government from the CBI”.
In a post on his social media account last month, he said “banks buy government bonds only to sell to the CBI under the repo mechanism to borrow.”
As a component of open market operation, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to investors, usually with short-term maturities, and buys it back the at the maturity date at slightly higher price.
As per CBI data, the money multiplier stood at 7.962, increasing 4.9% compared with the figure reported in the corresponding period last year and rising by 5.1 % in the course of 11 months.
Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.