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October 2018, No. 89


Economy

Liquidity Continues Inroads


If the government fails to check the increasing amount of wandering liquidity in the economy, its accumulation will cripple the economy and will no longer leave space for economic activity.


One of the plagues the economy is struggling with today is a huge amount of wandering liquidity under conditions that no productive and safe space has been predicted to guide the cash flow. Consequently, these days, we are witnessing accumulation of an ever-increasing amount of capital in the hands of the people, which keeps the economy away from the path of development and achieving long-term economic goals.

23% Jump in Liquidity in 2017/18

The Central Bank of Iran (CBI) announced the liquidity for the month of Esfand (February-March 2018) at more than 15,290 trillion rials, up by 22.1% compared to the corresponding period last year.
The money volume in this period was 1,946.7 trillion rials, which grew 19.4 percent from February-March of a year earlier. The quasi money in the statistical briefs released in February-March of the previous year reached 13,353.1 trillion rials, which increased by 22.5% compared to February-March of the previous year.
These figures indicate that the CBI has not abandoned its authority for printing fiat money and has increased the figure of wandering cash flows by 23% over the same period a year before. The high figure indicates the CBI’s poor performance in issuing money in the economy.

Government’s Failure to Control Liquidity

Interestingly, despite the adoption of policies such as advance sale of gold coins and massive supply of foreign exchange at the currency markets over the past few months, the volume of liquidity has been so high that the government was unable to reduce the wandering cash flow in the economy.
The government, however, is partly responsible for this situation. The government has played a major role in the growing trend of liquidity by making huge withdrawals from the banks. This has sparked widespread frustrations for the banks which are faced with scarcity of financial resources.

According to the same statistics, the banks’ liabilities to the CBI was 1,320.3 trillion rials in February-March 2017/18, which increased by 19.2 percent compared to February-March 2016/17 and 32.4 percent compared to the same period in 2015/16.

Under these conditions, if the government fails to check the increasing amount of wandering liquidity in the economy, its accumulation will cripple the economy and will no longer leave space for economic activity. The government will be unable to spend its economic assets on productive activities and will have no choice but to inject the liquidity into parallel markets. However, if the same economic policy persists, considering the uncertain and unproductive environment and the forthcoming sanctions, there would remain no safe room for investment and production except for economic frustration and a more turbulent economic environment.

It goes without saying that the track of rising prices and targeting the livelihood of people is the biggest danger threatening the people in this situation; right in a year that people were waiting for long strides to be taken to eliminate poverty, we are witnessing their living condition getting worse.

Banknotes Production Waste Causes Liquidity

Meanwhile, the member of Iran Chamber of Commerce, Industries, Mines & Trade believes that part of the liquidity is due to the waste in banknote production. According to Majid Reza Hariri, 15,300 trillion rials of liquidity which is equivalent to $400 billion (based on 42,000 rials per US dollar), is not a big figure compared to the economic expanse of our country – an economy with more than $100 billion worth of foreign trade per year and a high domestic trade. He claims that a portion of the liquidity relates to the government waste based on the production of money which is done under the title “Fiat Money Printing”.

Another part of the liquidity is related to spending from a treasury without production backup, such as the debts of some institutions that did not pay the people’s deposits and the government was forced to borrow from the treasury to meet the satisfaction of the protesters. Thus, the original debt remains and covers 14% of the liquidity.
Hariri stressed that before looking at the volume of liquidity attention must be paid to the whys and hows. When the government proudly announces that “we would not poke our nose into people’s business,” this liquidity too will focus on certain individuals and special people; on the other hand, it could also create the risk of an influx into different and uncontrollable markets, he added.

He noted that if financial transactions of individuals are monitored, it would prevent money laundering and tax evasion by big shots.
The vice chairman of Iran-China Joint Chamber of Commerce said: “If in the financial system there is no space for money laundering and tax collection systems can get taxes from incomes, they would reach a point of equilibrium and there would be no concern for liquidity. It will also lead to economic growth in industrial, mineral, agricultural and service sectors.”
Noting that liquidity is written and announced mostly according to bank statements, Hariri said: “For example, a person who had 100 units of debts last year, his debts for the current year is calculated with 26% of bank interest and penalties. In other words, 26% of the liquidity is related to bank debts written only in numbers but are not real.

 

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  October 2018
No. 89