December 2009, No. 54

Banking

Mahmoud Bahmani, Governor of the Central Bank of Iran

The volume of liquidity has finally exceeded 200,000 billion tomans, up by 198.5 percent compared to the end of the Iranian calendar year, 1383 (2004-05). The growth had been somehow slowed down when the governor of the Central Bank of Iran announced that the Treasury has been made inaccessible, but took up more speed afterwards.

The governor of the Central Bank of Iran has announced that the volume of liquidity has surpassed 200,000 billion tomans while the figure for the preceding year stood at 188,000 billion tomans and now, after just six months, the figure has been increased by 12,000 billion tomans.

During the past four years, an unprecedented rise in global oil prices which greatly increased Iran’s foreign exchange revenues caused the volume of liquidity to experience an unprecedented jump prompting the Central Bank of Iran to offer more facilities. Later, Tahmasb Mazaheri, the then governor of the Central Bank of Iran, reached the conclusion that those facilities have, in fact, led to an unprecedented rise in liquidity and subsequent inflation. He announced that he was going to close the doors of the Treasury with “three locks” to show that the Central Bank of Iran was determined to stop giving out more facilities and prevent further rise in the volume of liquidity.

Although the measures caused many difficulties for those who applied for bank facilities and faced them with liquidity crisis, it was not generally successful in reducing the volume of liquidity. As a result, Mahmoud Bahmani, the current governor of the Central Bank of Iran, is now reporting that liquidity has gone above 200 billion rials. Asked whether the increase in liquidity would not be followed by a parallel rise in inflation due to the relationship between the two economic variables, he said the variables were interrelated and as liquidity increased, so did the inflation. Bahmani also told the Iranian labor news agency, ILNA that he has frequently discussed with reporters the issue of how the liquidity is spent. “If it is currently spent, it would not lead to high inflation.” The governor of the Central Bank of Iran further noted that when liquidity is channeled toward production, it would not cause inflation. He then stated that spending liquidity on production will defuse its inflationary effects. “However, if it were spent elsewhere, it would increase inflation.”

During recent years, increased liquidity in Iran has not been spent on production and despite an increase of 198.5 percent in the volume of liquidity in the past four years producers have been struggling for money and have been complaining about shortage of liquidity and reluctance of banks to grant them facilities. They maintain that reduction in liquidity and the ensuing crisis for producers, has cast doubts on future outlooks of production in the country. On the other hand, liquidity which has been spent elsewhere in secondary or brokerage markets has greatly increased inflation, which in turn, has increased production costs.

Bahmani has noted that liquidity is like a two-edged sword; it may not increase production, but raise demand and cause high inflation. In this way, it seems that since liquidity has not been invested in production and has, instead, worked to raise inflation, the current level of liquidity announced by the governor of the Central Bank of Iran is dangerous for the whole economy. The liquidity, however, is still rising and policies adopted to restrain its growth have been only relatively successful.

The governor of the Central Bank of Iran has also announced that during the above-mentioned period, average inflation rate has been decreasing. He noted that point-to-point inflation rate stood at 20.2 percent in August, which has subsequently fallen to 13.2 percent by the end of September.