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June 2019, No. 91


Economy

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 assets.


Ali Divandari, Head of the Monetary and Banking Research Institute of the Central Bank of Iran


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 economic impulses.

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 CBI resources.

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.

 

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  June 2019
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