Budget Focus on Production to Curb Money Supply Growth

EghtesadOnline: A number of Iranian lawmakers and officials have voiced concern regarding the potential hazards of the steady increase in the country’s money supply (M2) in the past couple of years and called for measures to counter the alarming trend.

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02 February 2017

“One of the major concerns in the annual budget is the issue of money supply growth and the parliament predicts that the volume of M2 would increase by a further 4.5 trillion rials ($117.6 million) next year,” said a member of Majlis Joint Commission during a televised debate, Banker reported.

For the same reason, Gholamali Jafarzadeh Imenabadi added that “the parliament has strived to steer the budget toward increased production to reduce the supply of money”.

“There are currently 4,000 unfinished projects in the country and the government owes 900 billion rials ($23.5 million) to contractors,” he said, noting that it would be beneficial for everyone involved if the government focused on seeing these projects through, according to Financial Tribune.

Hamidreza Haji-Babaei, who heads the Majlis Joint Commission, also said,  “The volume of money supply has more than doubled in the past four years, such that it reached 12 quadrillion rials ($313.7 billion) in the current year from 4.94 trillion rials ($259.8 million) in 2013.”

The official, whose committee is focused on the sixth five-year development plan (2017-22), said a GDP growth of 8% has been envisioned for the country during the plan and 5.2% of this growth “must be realized through investments while 2.5% must come about through productivity”.

The five-year development plans offer a medium-term roadmap designed by the government and Majlis to help achieve sustainable growth, which outlines strategies in its budget planning for the next five years.

As part of the government’s plan, Haji-Babaei said 680 trillion rials ($17.7 billion) worth of investments must take place during the five-year period, “which figure was raised to 770 trillion rials ($2.13 billion) in the parliament”.

He added that up to $65 billion of the aforementioned figure must come through foreign direct investment and 180 trillion rials ($4.7 billion) of it must be provided by banks.

“The banks must direct their credits toward production and the Central Bank of Iran must be empowered to be able to practice better supervision,” he said.

Striking a Balance

A former head of CBI’s Monetary and Banking Research Institute commented on the government’s policy of creating a balance between liquidity and inflation, saying the important issue is that “the volume of money supply must be at a level that would match the volume of goods and services”.

“Managing liquidity is one of the biggest challenges of the country’s banking system and the economy as a whole and the government is looking to control it by constantly monitoring economic factors such as the state of supply and demand and production,” Ahmad Mojtahed also said in a talk with Exim news website.

Pointing to ways of employing liquidity for economic growth, Mojtahed, who is also a professor emeritus at Allameh Tabatabaei University, said the government is trying to make up for a “monetary void” by increasing market liquidity.

This strategy, he notes, is “a wrong policy and policymaking must be focused on the production sector and circulating working capital in the industries and agriculture sector”.

Mojtahed adds that “from the standpoint of money supply growth, we are still on a path of rise”, which underscores the role of the central bank to intervene because “if something is not done, it would lead to an increase in commodity prices”.