Criticism on the statements of the Governor General of the Central Bank of the previous government/ When Hemmati does not know how the effective exchange rate is determined
According to the economic reporter of Fars news agency, Abdul Naser Hemmati has recently criticized the economic performance of the 13th government and the central bank in a one-sided and unchallenged statement as an interview with one of the media.
In part of his statements, Hemmati claimed: “I am referring to the program that I gave to Dr. Rouhani in 2017 before I took over the responsibility of the central bank, in that program I mentioned that with the imbalance in the country’s financial system and with its dense liquidity and continuous growth, there are preparations for a shock. Currency is available in the country, Trump’s signature to withdraw from JCPOA practically pulled the trigger. When the trigger is pulled, the entire fault created in the economy is set in motion. In this four-page program that I will provide to the media soon, I emphasized that if we plan well, we can only prevent hyperinflation, but we will definitely have 50% inflation…»
These statements of Hemmati are completely contrary to the truth, because he agreed with the then president to keep the price of the dollar at 7 thousand tomans in order to take over the position of head of the central bank. Therefore, the claim that we can only prevent hyperinflation is not true.
In addition, Hemmati considered the increase in the price of the currency in the second half of 1998 and the first half of 1999 to be the increase in the price of gasoline from one thousand tomans to three thousand tomans. Of course, later it turned out that Hemmati himself had proposed to the president to increase the price of gasoline from 1,000 tomans to 5,000 tomans.
* Hemmati’s strange opinion regarding the reasons for the increase in the exchange rate
In the continuation of this interview, Hemmati said about the effect of the recent disturbances on the growth of the exchange rate: “Yes (the riots) caused a shock, but the reason for the rate jump is not the protests. The reason is the fundamentals of the market. Fundamental Bazaar says that you cannot have 40 or 50 percent inflation, but the exchange rate did not move…»
First of all, this comment by Abdul Naser Hemmati, who considers himself an economist, is very strange. Do fundamentals determine the exchange rate in the economy? Mr. Hemmati, who has been the head of the central bank for 2 years and 10 months, does he know anything about the effective exchange rate? Does he not know the effective exchange rate of the currency according to what components are determined?
But another more concrete question from Mr. Hemmati is that, in your opinion, when an economy faces an increase in the inflation rate due to an increase in the exchange rate, is the inflation still a reason for the increase in the exchange rate? We make this question clearer with an example, for example, the exchange rate went from 20 thousand tomans to 30 thousand tomans. This 50% increase in the price of the currency causes an increase in the price of intermediate imported goods, raw materials and final goods.
Also, this increase indirectly affects the price of other goods and services. Therefore, the inflation rate increases significantly due to the 50% increase in the exchange rate and reaches a high number. Can we claim some time later that because the inflation rate has increased, the exchange rate must rise again? If we accept this statement, we have actually accepted a vicious cycle of inflation-exchange rate or spiral of exchange rate-inflation. Why do we have inflation because the currency has gone up? Why does the currency go up because we have inflation?
* Ignorance of the former head of the central bank about the internalization of money
In another part of his speech, Hammati considers the 35% increase in the monetary base, which in reality is 34%, as the reason for the growth of the exchange rate. It is strange for someone who claims to be an economist and was the head of the country’s central bank for several years to say this. Is; Why? Because doesn’t this economist know, when the price of currency and other factors raise prices in the economy, it is inevitable to increase the volume of liquidity and monetary base to meet the real demand of the economy? Let’s not forget that the growth of the monetary base reached 42% in the last year of Hemmati’s attack on the central bank.
In addition, when inflation growth was 39.9% in the year ending November this year and point-to-point inflation was 44%, curbing the growth of the monetary base at the level of 34% is not an expansionary policy at all. When we talk about monetary variables like prices and growth, we are actually talking about nominal variables. Nominal variables must have a relationship with reality. Monetary variables have a posterior and antecedent relationship with each other. In all theories of monetary economics, it is acknowledged that if the growth of liquidity is lower than the inflation rate, the inflation rate will decrease.
In this regard, it is good to give an example, let’s assume, in an economy, the cost that the household has to pay for the purchase of essential items in a month in year (a), is equivalent to 1000 monetary units. But in year (b), due to the increase in prices, that household will have to pay 1300 monetary units to get the same items. In other words, due to inflation, their need for liquidity has increased by 30%. Now, if the supply of liquidity to the economy is less than 30%, what will happen? The household must buy less than last year, and eventually total demand will decrease and recession will occur. A similar example can be given for the production sector and economic enterprises to provide working capital.
Therefore, the demand for money is a function of inflation, and money has an endogenous property, and it cannot be considered an exogenous variable and based on that, the prescription is twisted. But Hemmati has assumed money as an exogenous variable in his statements.
If the inflation rate was, for example, 30% and the liquidity growth was 35%, it would definitely not be a good thing and it could have inflationary effects, but when the liquidity growth is at least 5% lower than the annual inflation and 10% lower than point-to-point inflation, would Can we consider liquidity as the factor of inflation and exchange rate?
* Acknowledgment of illiteracy
The former head of Central Bank also said in his speech: “…the fact that gentlemen say that we decided not to borrow from the Central Bank shows that they are not economically literate. If you borrow from banks, if you sell bonds or go any other way, you will end up borrowing from the central bank. You may not borrow from the central bank in the short term, but in the medium term it will lead to borrowing from the central bank, because all the ways you went will reach the central bank…”
This talk is interesting for those who have not studied the past years, but it is shocking for those who spend their days and nights following the numbers and economic and monetary policies of the governments. First of all, the basis of debt securities or public debt securities, which are sold by the treasury of the whole country in cash and are bought by banks and fixed income funds, was formed for the first time in the Central Bank during the era of Abdul Nasser Hemmati.
What is more interesting and strange is that the previous government was not very willing to do this, but Hemmati himself made the central bank sell bonds and pressured the government to finance with this method. What was the purpose of the Central Bank announcement at that time? Financing the budget deficit without creating new liquidity. On July 27, 2019, which was about 1.5 months after the sale of government bonds, Central Bank’s website published a news article, which was always passed word by word by Mr. Hemti’s hands and approved, with the following title:36 thousand billion tomans of government budget deficit was financed without creating new liquidity».
During the year 2019, the central bank provided the basis for the sale of more than 125 thousand billion tomans of debt securities. Hemmati in the Central Bank General Assembly meeting on March 26, 2019 In the presence of the president and the members of the general assembly, he said: “With the help of the Ministry of Economy, we were able to sell 115 thousand billion tomans worth of government bonds in 41 auctions, and if this was not done, the monetary base would have increased by 32% and the liquidity would have increased by 26%. The Central Bank prevented its realization.”
According to Fars, Hemmati’s performance and statements in 1999 show that he fully believed that instead of borrowing from the central bank, if the government sells debt securities, the central bank can stop the growth of liquidity and monetary base. Hemti’s look was wrong at the time, but he didn’t know that he was wrong. Therefore, Hemmati has admitted to his own illiteracy during the presidency of the Central Bank.
* The sale of debt securities does not work miracles, nor is it ineffective
But isn’t the government’s direct borrowing from the central bank and banks different from selling debt securities and regulating government debts? The experience of the last few decades shows that the only debts that were settled at the time of maturity were the debts for which bonds were issued, therefore, the issuance of bonds for debt regulates the government’s financing and debt system and is effective in creating government financial discipline. Is
But the previous government and the Central Bank made two big mistakes during Hemmati’s time. First of all, they thought that by selling debt securities to banks, the growth of liquidity will no longer increase from this place, secondly, they introduced a new instrument to the banks’ balance sheets at once, more than the banking system could handle, and this caused the banks to face a liquidity problem. become Therefore, the sale of debt securities is neither a healing medicine nor a miracle cure. Both notions are completely wrong.
* Excessive use of debt bond sales tool under Hemmati’s leadership over the Central Bank
The sale of debt securities in a situation where the economy and the banking system are facing excess liquidity can have a reducing effect on the growth rate of liquidity, but if the banking network is not in a condition of excess liquidity, the sale of bonds will reduce or minimize liquidity in the interbank market. and this issue forces the banks to give the bonds purchased from the government to the central bank and get liquidity.
In practice, this will increase the volume of liquidity and indirect government borrowing from the central bank. This actually happened in 1999 and especially in the second half of that year, but the effects of this action became more visible in 1400. When the banks sold a large part of the bonds they had bought in 1999 to the central bank in the form of open market operations, and the central bank was faced with the double choice of accepting an increase in the bank interest rate or buying back the banks’ bonds.
* A sharp reduction in the use of the instrument of selling debt securities in the 13th government
The sale of debt securities in 1401, both in terms of its ratio with the volume of liquidity and in terms of quantitative comparison, has been sold much less than in 1999 and 1400. In 1999, bonds equivalent to 125 thousand billion tomans were sold (about 100 thousand billion tomans were bought by banks).
In 1400, this figure decreased to 95 thousand billion tomans, in 1401, until December 24, only 35 thousand billion tomans of debt bonds have been sold. This shows the government’s attention to the condition of banks and also the reduction of reliance on this income tool. Therefore, all of Mr. Hemti’s criticisms regarding the papers and relating them to the 13th government are baseless.
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