Taming Inflation the Iran's CB Way
EghtesadOnline: The Central Bank of Iran says the coronavirus pandemic, deepening budget deficit and disruption in foreign trade are largely responsible for pushing up consumer prices in recent months.
The bank released a statement on its website Sunday to inform public opinion about the root causes of galloping inflation and CBI measures to control it.
Covid-19 was a body blow to both aggregate demand and supply as the central bank was compelled to adopt an expansionary fiscal policy to stimulate the economy, it said.
The government had approved 750 trillion rials ($3.2 billion) in coronavirus financial aid in April, from which 500 trillion rials were given as loans to SMEs and the remaining to needy families in the form of interest-free micro credit.
The situation had exacerbated by the already strained fiscal budget, forcing the government to approach the National Development Fund of Iran, the country’s sovereign wealth fund, for financial assistance.
NDFI holds a portion of oil and gas revenue for future generations but due to US sanctions, most of its resources remain frozen overseas. When the government borrows from fund, the CBI has to pay the government the rial equivalent of the forex it seeks from the fund.
The procedure is said to be the main reason behind the expanding base as the CBI has to print money for rial payment until the NDFI resources are accessible.
CBI Governor Abdolnasser Hemmati said this is “tantamount to borrowing from the central bank”, at least in the short-term and until the government finds a way to unfreeze its foreign assets to use them to back the rial payment.
“Under the conditions and due to measures taken to lift the economy, the money supply growth understandably parted ways from its past pattern[s] during the first four months of current fiscal year [March- July], ” the CBI statement reads.
Broad money supply reached 26,571.7 trillion rials ($115b) by June 20, growing 7.5% in three months from the beginning of the fiscal year. The monetary base grew to 3,834.7 trillion rials ($16b) by June 20 -- up 8.8%. The CBI report said money supply grew further by 9.1% since the beginning of the year until July 16.
Overall average annual inflation was 26.4% in the 12-month period ending July 21, according to the Statistical Center of Iran.
Disruption in Foreign Trade
To make a bad situation worse, foreign trade was largely disrupted due to massive border closures imposed by most countries to curb the pandemic and the failure of importers of Iranian goods and services to meet their commitments.
This posed insurmountable challenges for exporters struggling to bring their foreign currency earnings home. As if all this was not enough, the government’s already tiny oil revenue took another drubbing due to unprecedented plunge in crude oil exports in May.
In sum, the currency market panicked and fell into disarray as there was not enough forex to feed the market. Spike in currency rates by nature increase inflation expectations and its impact extended to all other markets, namely those relying on imports.
The CBI says it has mobilized efforts and used all the monetary policy instruments at its disposal to cope with the high and mounting inflation.
In May it introduced a plan to implement inflation targeting, saying that inflation is targeted at ±22% during the current fiscal year that ends next March.
“The central bank has taken all possible measures to direct inflation rate toward this target,” the CBI said, outlining the measures under three main areas, namely setting up bond auctions, creating an interest rate corridor (IRC) and introducing new instruments for growing the money market.
Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.
The CBI also raised the lower bound of the corridor from 10% up to 13% in June to collect the surplus liquidity in the interbank market.
The government has launched a series of bond auctions since May to sell government shares in major companies and raise funds to plug the budget deficit.
So far 464 trillion rials ($2b) has been raised in nine weekly auctions, a rather significant amount that the CBI says “has gone a long way in avoiding money printing to finance the budget”.
In bid to curb money supply growth, the CBI allowed lenders to issue certificate of deposits at 18%. Additionally, it raised interest on bank deposits in July to help reduce the outflow of money from banks.