Akbar Komijani said the economy is suffering from the supremacy of “the government’s fiscal policy over the CBI’s monetary policies.”
He was speaking in a ceremony to commend banks’ efforts to support low-income households. The meeting was attended by the First Vice-President Ishaq Jahangiri, the CBI website reported.
The senior banker referred to the US economic blockade since 2018, regular government budget deficits and the pandemic as the three main factors driving inflation in the recent years.
“In the past three years money supply growth, arising from the sanctions, budget deficits and the coronavirus pandemic, moved beyond the average long-term growth and fueled inflation” to new highs, he said.
Data released by the CBI indicate that broad money supply reached 34,761.7 trillion ($144 billion) at the end of previous fiscal year on March 20 – up 40.6% compared to the year earlier.
The monetary base jumped from 3,528.5 trillion rials ($14.7b) in March 2020 to 4,559.5 trillion rials ($19b) in March 2021, indicating 29.2% y/y growth.
Staggering growth in money supply and the monetary base has pushed consumer price inflation to levels unseen in modern Iranian economic history. Latest data released by the Statistical Center of Iran said overall average goods and services Consumer Price Index in the 12-month period ending June 21 increased by 43% compared to the corresponding period the year before.
The government’s budget deficit is seen as the main driver of exploding money supply. Lack of sustainable revenue and steep decline in oil export has led to a troubling pattern of deficits. The tough US restrictions have taken a heavy toll on crude oil export, the lifeblood of Iran's economy.
“As with central banks around the world, the CBI is striving to harnessing inflation,” Komijani told the gathering.
Role of OMOs
Expanding open market operation policy, taking measures to control “inflation expectations” and maintaining fiscal stability are key priorities, the regulator has said.
OMOs were launched in early 2020 by the CBI. Using bonds as collateral to borrow from the CBI and regulating interbank interest rate are key elements of the OMO.
Elaborating on ways to create fiscal stability, the CBI boss pointed to enforcing “cautionary policies” in the banking system and plugging budget deficit holes in ways other than printing money, namely issuing bonds.
Underlining the role of foreign exchange policy in controlling inflation, Komijani said the policy is closely tied to monetary policy.
“Given the [US] economic sanctions, balancing the currency market is on the agenda,” he said, reiterating that forex rates should be determined by “fundamental economic factors”.
To stabilize the currency market, he said a roadmap is needed to facilitate the import of basic goods by the government. This could be achieved through “coordination among administrative bodies” to access currency for import.
“Facilitating repatriation of forex income and diversifying repatriation methods for exporters is crucial,” the senior banker said.
$540m in Loans to the Needy
The CBI governor commended banks’ support to the needy and underprivileged, saying that lending to low-income households has been fruitful despite the piling pressure in bank resources.
In the first three months of the present fiscal year (ends March 2022),the CBI allocated 130 trillion rials ($540 million) in loans to those covered by state charities, namely Imam Khomeini Relief Foundation and State Welfare Organization of Iran, Komijani said.
The figure has increased sevenfold compared to 2018. It was was 20 trillion rials ($83m) in fiscal 2018-19, 50 trillion rials ($208m) in 2019-20 and 80 trillion rials ($333m) in 2020-21.
Komijani said rise in the so-called “mandatory lending” reflects the government’s focus on boosting domestic production and creating jobs “despite the fact that banks have difficulty paying such loans.”
Compulsory loans are paid by banks as per rules set out by the Majlis for the government and banks are obliged to pay it.
According to Komijani, compulsory lending has increased extensively. Banks must pay 7,500 trillion rials ($31.2b) in loans by next March. The segment of lending was 1,560 trillion rials ($6.5b) last year.
Experts have warned that the obligation on banks to pay such hefty amounts could result in high-powered money and money supply growth, which is at odds with the CBI’s mandate to control money supply and curb inflation.