Bank Borrowing From CBI Pushes Up Monetary Base

EghtesadOnline: The monetary base expanded to unprecedented levels in the calendar month to Dec. 31 due mainly to banks’ excessive borrowing from the Central Bank of Iran.

News ID: ۷۸۷۶۶۲

22 January 2022

It grew 37.6% in the 12 months ending Dec. 31, CBI said on its website without giving details.

The growth was up 22.2% over nine months since the beginning of current fiscal year that ends March -- 6.7 percentage points higher compared to the corresponding period last year.

The growth apparently was driven by the deep liquidity crunch in the interbank market that has given rise to banks’ monumental debt to the CBI. To quench lenders’ thirst for liquidity the CBI has regularly implemented open market operations (OMO) in recent months.

Shortage of liquidity in banks is linked to the exploding government budget deficits and obligations imposed by it on banks to lend to help stimulate the economy.

The CBI said that such lending practices explain the 12.8 percentage points and 8 percentage points of monetary base growth. Respectively, in the past 12 and nine months.

The regulator’s policy to try and maintain an adequate supply of money in the interbank market partly arises from concerns about the sharp increase in interbank rates and its possible detrimental impact on asset markets.

In line with OMO policy, the regulator also has conducted repurchase agreements (repo) in recent months pumping huge sums into needy banks.

As a component of OMO, repo is a form of short-term borrowing by dealers in government bonds. In a repo, a dealer sells government securities to buyer (in this case the CBI), usually with short-term maturity and buys it back at the maturity date at a slightly higher price. The maturity date in Iran’s interbank market usually is seven days.

Censuring the mounting pressure on banks to lend, former CBI governor Abdolnasser Hemmati described the practice as an “indirect borrowing by the government from the CBI”.

In a post on his social media account earlier in the week, he said “lenders buy government bonds only to sell to the CBI under the repo mechanism to borrow.”

In another post on Instagram, he said “borrowing from the CBI has reached 1,120 trillion rials [$4.2 billion] while pending repo contracts amount to 740 trillion rials [$2.7b]”.

Broad Money Surges 41.4%

According to the CBI data, broad money growth jumped 41.4% in 12 months ending Dec. 21 – a slight decline of 0.6 percentage point on the annualized growth a month before.

Broad money increased 27.4% during the first nine months of fiscal year. The CBI said this growth could have been lower had it not been because of audit operations for a megamerger of five banks last year.

Accordingly, transfer of the general ledger of Mehr Eqtesad Bank to Bank Sepah accounted for 2.7% of broad money growth.

General ledger provides a record of financial transactions during the life of a company and holds accounts’ information needed to prepare a company’s financial statements. Transaction data is segregated, by type, into accounts for assets, liabilities, owners’ equity, revenues, and expenses.

“Excluding the merger of general ledgers, broad money would rise 38.7%% on an annualized basis and 24.9% in the nine months period,” the bank said.

The CBI said the rise in broad money due to the banks’ merging process “had no monetary and inflationary implications” because it was more related to statistical procedures than the real increase in money supply.

Transfer of ledgers was the final phase of the megamerger that started in early 2019. It involved Bank Sepah, the oldest in Iran and one of the three still under government ownership, four banks and one credit institution owned by the Iranian armed forces, namely Ansar Bank, Bank Hekamat Iranian, Mehr Eqtesad Bank, Ghavamin Bank and Kosar Credit Institution.