In a talk with state TV, Mohammad Nadali said the majority of money supply is created mainly by banks and as a result of the CBI’s monetary operations.
“A big portion of money is controlled by banks and money circulating among the people accounts for barely 2% of the liquidity in the financial system,” he was quoted as saying by the CBI website.
Put simply, money creation, or money issuance, is the process by which money supply in a financial system is increased.
The official said the regulator is not indifferent toward money supply expansion and has different controlling mechanisms. Restoring discipline to the monetary system demands “energetic collaboration among all economic decision makers,” he noted, adding that the CBI is only “one player in the government’s economic team.”
As for measures taken to limit money creation by banks, Nadali pointed to a decision by the Money and Credit Council last November based on which assets of banks are monitored at regular intervals.
As per a CBI bylaw, the monthly asset growth of specialized banks should not exceed 2.5%. Likewise, commercial banks are not allowed to increase assets in their balance sheets beyond 2%.
Nadali said specialized banks abide by the cap and the majority had monthly asset growth below 1%. “The case with commercial banks is different and on average their monthly asset growth exceeded 2%.”
The senior banker noted that control over lenders’ assets does not include all items shown in the balance sheets. Investment in non-bank activities, increase in costs, expanding branches and buying fixed assets are among activities that the CBI wants lenders to refrain from.
On the flip side, the regulator says it is positive about improvement in banks’ balance sheets resulting from capital increase and purchasing government bonds.
Apart from monitoring balance sheets, the CBI oversees the management structure of banks and lenders are obliged to uphold meritocracy and professional skills when hiring members of their board of directors.
Banks’ excessive borrowing from the central bank declined after the regulator began implementing open market operations as its new monetary policy, Nadali recalled.
Taking stock of the high number of banks operating in the country, he said such abundance makes efficient supervision difficult.
Up until 2020 there were 36 banks in Iran. Now it is 32 after four troubled banks merged with the state-owned Bank Sepah.
Budget Deficits
Despite the regulator’s concerted efforts to curb money supply growth, the senior banker pointed to the government’s deep budget deficits as the main culprit behind the unprecedented growth in money supply.
According to available CBI data, the monetary base jumped 42.1% or 1,530 trillion rials ($5.6 billion) in the 12 months to August 22, reaching 5,160 trillion rials ($19b). It was also up 12.4% or 570 trillion rials ($2b) in the five months since the beginning of the current fiscal year on March 21.
Broad money supply expanded by 12.8% in five months and rose 39.1% in 12 months ending August 22 to reach 39,220 trillion rials ($145b).
On a monthly basis, money supply grew 2.7% or 1,020 trillion rials ($3.7b). This means that in the preceding calendar month, 34 trillion rials was added to the financial cycle per day.
CBI lending to the government in the form of discretionary spending is seen as another key factor in the rising monetary base.