Iran: Declining Long-Term Deposits Sounds Inflation Alarm

EghtesadOnline: A report on the value of deposits with 11 selective banks shows long-term deposits are increasingly turning into sight deposits, rising concerns about inflation in prices as depositors may funnels their money into various markets.

News ID: ۷۴۹۶۰۹

03 February 2020

The report, published on the website of the Securities and Exchange News Agency, put the total value of deposits with the 11 lenders at 9,250 trillion rials ($71 billion) by the end of calendar month to December 21.  This accounts for 45% of the total bank deposits, according to Financial Tribune.

Data is based on financial reports of the banks on codal.ir, an information website created for instant official publication of corporate data and news about companies listed with Iran’s stock exchange.

The share of sight deposits with the banks, which had grown 15% monthly to Nov. 21, rose to 16% one month later. This indicates a 40% annual increase. The value of long-term deposits, however, shrunk proportionately in the period.

Long-term deposits gained traction after the Central Bank of Iran decided to scrap overnight interest rates in January 2019.

The new interest rate mechanism obliged banks and credit institutions to pay interest on deposits on a monthly basis with the minimum balance in the month as the base.  Interest rates per se remain unchanged as only the calculating mechanism has changed from overnight to monthly.

Scrapping overnight interest rates actually meant that long-term deposits turned into short-term accounts that are not usually kept long enough with banks.

Looking for Better Options

The initiative was expected by many economic observers to shift liquidity from short to long-term deposits, which in turn, would empower banks and credit institutions to lend more to businesses and industries.

The descending order of long-term deposits in recent months shows that although the measure was effective for some time, people in big numbers started withdrawing their money from banks, probably in search of greener pastures.

This trend is expected to gain momentum as the Iranian fiscal year comes to an end and at the time when more than 2,000 trillion rials ($15 billion) in certificates of deposit will mature.

CD owners in no small numbers are expected not to extend their agreements with banks at the current 20% interest rate due to the high and rising inflation and potential for speculative activities under the difficult economic climate, according to SENA.

A CD is a product offered by banks and credit unions that offers an interest rate premium in exchange for the customer agreeing to leave a lump-sum deposit untouched for a predetermined period of time.

In the absence of any measure on the part of the CBI to adopt contractionary policies, a portion of long-term deposits is expected to be turned into sight deposits, which is raising fears that financial markets in Iran may experience a new bout of price shock emanating from inflow of new liquidity.

Contractionary monetary policy involves central banks raising interest rates to reduce the money supply in order to curb inflation.

Expanding the share of sight deposits partly corroborate the assumption of depositors’ unwillingness to keep their money in banks at 20%, which obviously is low compared to the galloping inflation and systematic decline in value of the national currency.