Money Supply Explodes With Gov’t Borrowing From the CBI

EghtesadOnline: Money supply has jumped to unprecedented levels as government borrowing from the Central Bank of Iran takes on extraordinary proportions.

News ID: ۷۸۷۱۳۵

11 October 2021

CBI data on Saturday show the net value of government’s arrears to the CBI stood at 351.4 trillion rials ($1.3 billion) in the fifth calendar month to August 22.

Government debt to the CBI jumped 256.3% in five months since the beginning of the current fiscal year. It was 207.4% higher than the corresponding period last year.

Overreliance on CBI money was the main contributor to the expansion of the monetary base.  It shot up 42.1% or 1,530 trillion rials ($5.6 billion) in 12 months to Aug. 22, reaching 5,159.4 trillion rials ($19b). It was up 12.4% in five months since the beginning of the current fiscal year in March.

CBI lending to the government in the form of discretionary spending is said to be the main reason behind the explosion in money supply. Data suggest that the former government borrowed 555.3 trillion rials ($2b) from the CBI for deficit spending.

Need for increased discretionary spending became more conspicuous after the government failed to realize the  ambitious revenue forecast in the annual budget.

*** Near 40,000 Trillion Rials

Broad money supply stood at 39,214.3 trillion rials ($145b) by Aug. 22, 39.1% higher on an annualized basis. It climbed 12.8% in the first five months of current fiscal year.

Money (M1) and quasi money (M2) are the two components of money supply. The former is composed of physical currency and coins, demand deposits, travelers' checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts. M2, also called near-money, refers to less liquid assets that can be quickly exchanged for cash. Examples are bank certificates of deposit and treasury bills.

As per CBI data, M1 increased 36.4% in the 12 months and rose 13.1% in the first five months of the current fiscal year to 7,815.7 trillion rials ($28.9b) accounting for 19.9% of the total money supply.

Constituting 1.8% of M1, banknotes and coins in circulation amounted to 726.6 trillion rials ($2.6b), down 1.1% in five months and rising 22.5% annually.

Despite the monthly increase, the CBI said M1 growth lost momentum compared to the 88.6% rise in October 2020.

M2 increased 39.7% compared with the corresponding period  last year, amounting to 31,398.6 trillion rials ($116.2b). It increased 12.7% in five months.

The CBI says decline in the percentage of banknotes and coins in circulation to bank deposits as well as decline in the ratio of lenders’ legal reserves to deposits pushed up the money multiplier in the mentioned month.

Money multiplier was 7.601, the highest in seven months, up 0.3% in five months but 2.1% lower compared to the first five months of the previous fiscal year. The figure indicates that with each rial created by the CBI money supply increased by 7.6 rials.

Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.

Lenders legal reserves fell from 304.1 trillion rials ($1.12b) in mid-March to 277.5 trillion rials ($1b) in mid-August.