The CBI said the stress of liquidity growth “has rightly become a catchphrase among analysts and attracted attention in the past year”.
Although the bank has not released details about liquidity growth since last December, in a press release last month it said liquidity had climbed to 24,721 trillion rials ($145 billion) at the end of the last fiscal year (March 2019) – up 31% on a year-on-year basis.
The figure is staggering in that it is higher than the average liquidity growth in the long-term as acknowledged by the CBI.
“The current liquidity growth rates are by no means desirable for the central bank.”
Liquidity in Iran has seen high growth rates in the past 50 years. Reviewing its growth in the past five decades, the CBI said liquidity was 16.9% on average in the 1960s, 30% in the 1970s, 18.4% in 1980s and 26.7% during 2000s (by the end of March 2020).
Accordingly, the highest annual growth was registered for fiscal 1974-75-- at 57% followed by 2006-07 at 39% and in 1995-96 it was 38%.
The bank, however, attributes the ballooning liquidity to “mounting pressure on the government budget due to tough restrictions on oil export... and the central bank’s purchase of currency from the NDFI”.
It merits mention that the government has often approached the NDFI, the country’s crisis lender and sovereign wealth fund, for financial aid as its own revenues were not adequate to cope with multiple crises, such as the deadly floods in March 2019 and the ongoing coronavirus pandemic.
NDFI, which is independent of the government, technically holds a portion of oil and gas revenue for future generations when government earnings are high.
The fund’s resources are largely from oil and gas exports kept in an account with central bank. When the government borrows from the fund, the central bank gives the same amount in rials to the government, which the CBI says is one of the main reasons behind the unprecedented liquidity growth.
The CBI enumerated some of its efforts to curb liquidity growth seen “as the main driver of inflation and macroeconomic instability”.
Among the efforts are “moves to improve oversight of banks and credit institutions and curb their overbrowning from the CBI”, cubing competition among banks to offer higher interest rates to attract the people’s savings and deposits, launching the open market operation and holding auctions for selling government bonds.
The regulator stressed that the key to its success in controlling liquidity, and by extension, inflation obviously lies in the government’s will “to uphold financial discipline” and “avoid resorting to CBI resources to compensate for budget deficits.”