Liquidity in the Iranian Economy
High volume of noncurrent claims,
real estate, frozen bank assets and banks involvement in buying small and
medium enterprises escalated the dilemma of declining quality of bank
One of the prerequisites for successful monetary policy is to have a healthy
and stable banking system. In such an environment, the monetary policymaker
will also be able to achieve the macroeconomic goals with respect to other
aspects of the matter. Accordingly, in the Iranian economy, due to the
problems and challenges faced by the banking system, structural reform and
improvement of financial stability in the banking system have been
emphasized by the scientific circles, trusted institutions and policy makers
in recent years.
After organizing the unauthorized monetary and credit institutions and
gaining valuable experience in this regard, the issues and mechanisms for
making structural reforms in the banking network and reducing the imbalance
in troubled banks were raised. On the one hand, the high volume of
noncurrent claims, real estate, frozen bank assets and banks involvement in
buying small and medium enterprises escalated the dilemma of declining
quality of bank assets.
On the other hand, the shortage of resources for the granting of new
facilities and the failure to pay high interest rates to investment deposits
had accelerated the process of additional withdrawals of the banks from the
Central Bank of Iran (CBI) and their growing debts.
These problems had made impossible the continuation of the former banking
trend and the destructive competition in paying higher interest rates to
attract resources. For the same reason, since the middle of the last
calendar year, with the aim of reducing banks’ imbalance and stimulating the
real sector of the economy, reappraisals of maximum interest rates to
deposits were announced. It was expected that in case other steps towards
structural adjustment in the banking network were taken, part of the
above-mentioned problems and challenges would be settled to a large extent
and it would have a satisfactory performance in the face of frustrations and
Nevertheless, the hostile attitude of the new US administration, its
withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the
imposition of unilateral sanctions disrupted the foreign exchange system and
exacerbated speculation in the market and price fluctuations in these
markets. The sharp fluctuations in asset prices increased the demand for
money and, as a result, the conversion of investment deposits into current
deposits, or the technical conversion of quasi money into money occurred.
Since some banks already had liquidity problems and resource constraints
beforehand, the conversion and transfer of deposits increased liquidity
pressure on banks and made the attempt to manage liquidity at the banking
level and curb it at a macro level as a key issue.
In order to provide a clear picture of the effects of currency fluctuations
on the bank’s balance sheet as well as liquidity dynamics, macroeconomic
data is reviewed briefly at various stages this year.
Liquidity at the beginning of 1397 (2018/2019) was 15,300 trillion rials. In
September, liquidity increased to 16,700 trillion rials, and concurrently
the trend of money share reversed and rebounded to 14.6%. Rise in demand for
current deposits will decrease the lasting of the deposits and as liquidity
increases, banks face liquidity risk, and thus they inevitably resort to the
Statistics show that the monetary base at the beginning of 1397 amounted to
2,140 trillion rials and the banks’ debts to the CBI stood at 1,320 trillion
rials. At the end of Shahrivar (September), the monetary base reached 2,340
trillion rials and the banks’ debts increased to 1,500 trillion rials. This
trend clearly shows that in the first half of the calendar year, the banks’
debts have had a 90% increase in the monetary base and have become a
dominant factor in increasing the monetary base.
Fortunately, both in the government and at the CBI good consensus has taken
place on the need to pursue structural reforms in the banking system.
Obviously, the success of structural reforms in the monetary and banking
system demands prerequisites and requirements, most importantly, having a
comprehensive operational plan as a roadmap for structural reforms.
In this regard, in an important step to reform the banking system structure
and with the aim of focusing on the capabilities and capacities of the
banks affiliated to the Armed Forces, the process of merging Ansar, Ghavamin
Bank, Hekmat Iranian Bank, Mehr Eqtesad Bank and Kowsar Bank in Bank Sepah
started in March 2019.
It is hoped that this merger will be productive in enhancing the functioning
of the banking system and further steps will be taken to improve the banking
structure in a systematic and effective way, in order to see the improvement
of the health and stability of the banking system.