The Central Bank of Iran in a report said the amount is 2.2 percentage points higher than the first half of the year ending Sept. 21. Money supply jumped 26.6% since the beginning of the current fiscal year in March when it was 24,721.5 trillion rials ($103b).
As for the main components of money supply, the CBI said the share of money (M1) stood at 6,170 trillion rials (25.7b) by Dec. 20 or 69.8% higher compared to the same period last year. M1 increased 44.4% in nine months.
The total value of banknotes and coins in circulation was 642.2 trillion rials ($2.6b) by Dec. 20 -- 21.7% higher compared to the same period last year. It was up 5% over nine months since the beginning of the fiscal year.
Quasi-money (M2) grew at a slower pace compared to M1 and was over 25,129.9 trillion rials ($104.7b) to post 32.3% growth on an annualized basis. It expanded 22.9% in the reviewed nine months.
M1 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.
The contribution of M1 to money supply increased from 17.3% in March 2020 to 19.7% in December. Similarly, the share of M2 declined from 82.7% to 80.3% in December, raising fresh concerns about shorter periods money is parked in long-term bank accounts and the flow of liquidity into markets ultimately pushing up consumer price inflation.
Monetary Base & Money Multiplier
Increase in money supply can be a function of either the monetary base or money multiplier. The monetary base jumped from 3,142.6 trillion rials at the end of Q3 last year to 4,075.4 trillion rials ($16.9b) in the first nine months in the current fiscal year, indicating 29.7% annual growth. It was 15.5% higher since the beginning of the year to Dec. 20.
According to CBI data, increase in foreign assets has been the main driver of growth in the monetary base. The net value of CBI foreign assets was 3,838.3 trillion rials ($16b) up 24.9% annually and 10.3% higher compared with the beginning of the year. Increase in asset value contributed to 24.4% of the annual monetary growth.
Money multiplier reached 7.68 points at the end of Q3, which is 6.7% higher compared to the corresponding period in the last fiscal year. This means with each rial created by the CBI money supply increase by 7.68 rials.
Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.
Citing principles of monetary economics, experts say when increase in money supply is caused by money multiplier, it shows that banks are doing well in the process of taking deposits and giving loans. However, whenincrease in “unbridled money supply” stems from the monetary base, it indicates that the government is counting on the resources of the central bank.
Driving Factors
As to what has led to the colossal money supply, the CBI earlier blamed multiple factors, namely the government’s over-borrowing from the CBI and the National Development Fund of Iran (the sovereign wealth fund), even when NDFI’s forex funds were inaccessible due to the US economic blockade.
In response to the government’s request to tap NDFI resources to fight natural disasters and the coronavirus pandemic, the CBI has no choice but to keep paying the rial equivalent of money the government borrows from the fund.
The procedure is said to be the main reason behind the expansion of money supply as the CBI should print money for rial payment until the NDFI resources are freed and accessible.
The monetary system in Iran has recorded some of the most staggering figures in money supply expansion. Money supply has expanded exponentially in the past 50 years. Records say money supply growth on average was 16.9% in the 1960s, 30% in the 1970s, 18.4% in the 1980s and 26.7% in the 2000s (end of March 2020).
Accordingly, the highest annual growth was in fiscal 1974-75 at 57% followed by 2006-07 at 39% and 38% in 1995-96.