NDFI Withdrawal Could Be a Savior

EghtesadOnline: Governor of the Central Bank of Iran says the government decision to withdraw money from the National Development Fund of Iran, the country's sovereign wealth fund, could be an opportunity to help stabilize the forex market.

News ID: ۷۴۷۰۵۶

14 April 2019

Abdolnasser Hemmati wrote in an Instagram post on Friday that the scale of damage inflicted by the recent floods had made withdrawal from NDFI inevitable.

Hemmati said the CBI can draw on the move by offering foreign currency in the market and maintain stability by lifting the supply side.

“The CBI will continue to pursue its regulatory role and use [NDFI] resources to help stabilize the market and strike a balance on the supply and demand side,” Financial Tribune quoted him as saying.

Unprecedented heavy rains which began in late March caused flooding across the country, mainly in the northern and southwestern regions. At least people were killed and thousands were displaced by the floodwaters. Material losses are said to be to the tune of several billion dollars, mainly to homes, farmlands, roads,  bridges and power and water infrastructure.

In earlier statements, the CBI chief assured the flood victims that banks are mobilizing to assist them by facilitating grants, easy loans and long-term financial resources.

Budgetary Constraints

The CBI boss had earlier said that given the scale and scope of the damage, the current budget resources are stretched and cannot meet all the needs of flood-hit regions. “There is no other alternative but to withdraw from the NDFI.  “

A faculty member of the Allameh Tabataba’i University says the flooding has incurred damages far beyond government capability to compensate, especially at a time when the government has a tough year ahead given the budgetary constraints and deficit spending.

Lotfali Bakhshi, an economist, told ISNA that the government spends over 90% of its budget on current affairs and barely 10% goes for development and infrastructure. “Since damages relate mainly to infrastructure, the government will face serious challenges [in repairing the damages].”

He proposed issuing participatory bonds as an option to help rebuild the flood-stricken areas.

Fatemeh Zolghadr, a lawmaker, on Monday spoke about President Hassan Rouhani’s request for €2 billion from the NDFI. The funds are to help to alleviate the plight of flood victims and rebuild damaged infrastructure.

Withdrawing money from sovereign wealth fund is subject to authorization of the Leader of the Islamic Revolution Ayatollah Seyyed Ali Khamenei.

Citing assessment reports, the MP said the flood damages are estimated to be as high as 300 trillion rials ($2.2 billion), adding that “the current year’s budget simply cannot compensate the flood losses.”

Apart from the sovereign wealth fund, other options to help the flood victims include issuing participatory bonds and opening credit lines by the CBI for agent banks” ICANA, the parliamentary news website, quoted her as saying.

The government plan to withdraw from NDFI was later confirmed by Hadi Ghavami, a member of Majlis Plan and Budget Commission, emphasizing that the parliament will help in this regard.

“The proposal has been drafted by the commission and presented to the chamber for approval in upcoming week,” IRNA quoted him as saying.

Restructuring Monitory Base

Hemmati pointed to CBI measures in the current fiscal to (started March 21) to help boost domestic production. More particularly, he pointed to changes in structure of the monetary base, lowering interest rates, and curbing rising banks’ demand for CBI loans.

The economic motto for the new Iranian year was billed by the Leader as the year for "enhancing production" to help shore up the sanctions-hit economy without outside help.

Monetary base is the total amount of a currency that is either in general circulation in the hands of the public or in commercial banks held by the central bank.

In addition, he expressed the hope that in the current fiscal exporters would repatriate their currency earnings to the country.

The governor denied benefits in rising interest rates for the banking system or the economy. “In the present economic conditions increasing interest rates will be of no help. It will simply increase production costs,” he wrote.

In a talk with reporters this week, he announced the CBI’s decision to alter the liquidity structure by curbing the money supply and lowering bank rates.

"Our goal is to change the liquidity structure. The main reasons for the rise in money supply are (high) deposit interests and the multiplier effect. We must reduce (the two variants) and increase the monetary base,” he said.

The multiplier effect refers to the disproportionate rise in final income emanating from injection of spending. In other words, capital infusion, whether it be on the government or corporate level, should have a snowball effect on economic activity.

With a combination of these measures, the regulator is trying to secure the needed funds to enhance production and improve the economy, Hemmati said.