Liquidity Harming, Not Helping Manufactures

EghtesadOnline: Unusually large volumes of liquidity is flowing into non-productive sectors and speculative markets, instead of boosting manufactures, an economist says.

News ID: ۷۴۹۹۶۷

04 May 2020

“Directing liquidity toward manufacturing demands that the yields in speculative markets decline,” ISNA quoted Hossein Abdoh Tabrizi as saying.

Lower returns in real estate, stock market and the likes can shift the focus of investors towards the myriad of unfished development projects or put money into business that create value, the senior economist said.

“Despite the ballooning liquidity, assorted businesses face a credit crunch and are in dire need of financial assistance.”

Data from the Central Bank of Iran show that liquidity has gotten out of bounds. It crossed 22,623 trillion rials ($141.3 billion) as of last December, marking the end of the third quarter of last Iranian fiscal year (March 2019-20).  The figure was up  28.2% on an annual basis.

The government’s insatiable thirst for funds has compounded the situation for the private sector.  “The government needs to fix its budget deficits, and more recently pay for costs arising from the coronavirus. This has transformed it into a rival of private firms in the financial market and the bourse,” he rued

As a result private sector distress has grown along with the emergence of the crowding out phenomenon.

“With the private sector in dire need of working capital for meeting high production costs, sees the banks as too weak” and unable or unwilling to lend to businesses in need, Abdoh Tabrizi told the news agency.

In April the government announced a rescue package based on which an estimated 750 trillion rials ($4.6 billion) was set aside to help small and medium enterprises hit hard by the covid-19 pandemic.

According to government figures, the regulator allowed banks to tap into their legal reserves to access funds.

Role of Interest Rate

The free market advocate pointed to interest rates as one of the key factors (but not the only one) in directing funds toward production and job creation.

He stressed the need to bridge the gap between interest rates on deposits and on loans, saying that the rates are determined largely by market forces but central banks also intervene.

Besides reasonable interest rates, a functioning economy needs normal, and if possible cordial, ties with the international community, a calm and stable business environment, high-tech, productive human resources along with optimal use of national resources, such as cheap energy, he was quoted as saying.

Last month heads of banks and credit institutions decided to comply with the interest rate ceiling set the by the CBI and stop paying higher rates on large desists.

The central bank had set a 15% cap on long-term deposits but lenders were given leeway to raise it up to 18%.

The CEOs also decided to lower interest rate for short-term deposits to 8%, down from 10%.

Rates went as high as 20% during the currency chaos last summer, and the CBI turned a blind eye to the higher rates because of its own policy pushing for measures to lure savings to banks and control high and rising forex rates by curbing demand for hard currency.

A general tendency among Iranians to invest in non-productive sectors was confirmed by a poll by the Iran Student Polling Agency (ISPA) in the middle of the last fiscal year.

The results show hardly 10% of those polled preferred to use their money for manufactures, while banks were rated as the most attractive option to protect their savings.

The poll also found out that investing in real estate was the second best investment for large numbers more concerned about the tanking of the rial.

However, more recently, there is a growing tendency to invest in the stock market that has seen historic growth drawing investors in ever increasing numbers.