Financing the development of Azadegan oil field is inflationary
According to Tejarat News, an important theory in the economy introduces the method of financing the Azadegan oil field development project as the cause of great inflation in the economy.
The quantity theory of money is one of the most fundamental laws of economics that can predict the effect of many macroeconomic policies before they happen. Based on details like this, the amount of liquidity multiplied by the speed of money circulation is equal to the amount of economic tradable assets multiplied by prices.
What is some money theory?
In order to get more familiar with the working of this theory, it is good to know that this theory can clearly predict the effect of liquidity on the increase in prices. In a situation where liquidity grows in the country, assuming that the speed of money circulation is constant, if this amount of money does not neutralize the other side of the equation through the production or supply of tradable assets, it leads to an increase in prices and an increase in the inflation index.
Despite being familiar with the theory of some amount of money, let’s inquire about this economic equation based on the recent agreement between the government and banks. A memorandum of understanding for investing in the development of Azadegan gas field.
Financing mechanism for the development of Azadegan oil field
Based on the details revealed so far from the banks’ contract with the government, the amount of investment in this plan is 7 billion dollars. Investment made by Azadegan Exploration and Production Company. This company includes 6 banks: Mellat, Tejarat, Melli, Parsian, Pasargad and Shahr. 6 exploration and production companies of Khatam, Persian Oil Industry Development, Energy Gostar Sina, Mapna and Ovik are also among the other collections of this company. In other words, 80% of the 7 billion dollar financing of Maidan development is done by the mentioned 6 banks.
Why is this project inflationary?
At first glance, this project and its financing method may seem positive due to the role of increased oil production in the economy. But it should be noted that the issue of its financing does not have a positive effect on the economy.
To understand this issue, we must study the theory of some money, regarding the financing of the Azadegan oil field project. The growth of 5.6 billion dollars is done directly from the financing of the banking system. This mechanism is also carried out at the dollar rate of 32 thousand tomans, equivalent to 179.2 thousand billion tomans. This figure is equivalent to 71% of the total construction budget of 1401 and has a significant impact on the right side of the formula of the amount of money.
Therefore, the effect of the financing of the Azadegan oil field development project in the economy, assuming a constant rate of cash flow, should be discharged in production. But if this issue does not happen, the price index and inflation will increase in the society.
Based on this, if we pay careful attention to the financing system, we will understand that the way the banking system invests in this project provides the basis for improving the assets of the banks from the shareholding of Maidan Development Company. But this shareholding cannot be traded in the market and will be deposited in the banks’ balance sheets. For this reason, the increase in liquidity from the place of investment of the banking system in the project did not end with the promotion of production and is completely drained by the increase in inflation.
What is the logical solution?
The issue of inflation in the way of financing the Azadegan oil field development project occurs in a situation where there is a non-inflationary method through making the shares of this project tradable. The development of the Azadegan oil field could be entrusted to the banks in the stock exchange, according to the mechanism of the joint stock company of the project. In this case, the banking system would only finance the project from the profit guarantee of the company’s shares equivalent to only 20% of the value of the shares. If there was such an approach, we would face a huge tradable asset in the economy and there would be no news of inflation.
Based on this, it seems that before reaching the contract stage, the government should take care of creating a huge inflationary wave in the economy by revising the financing process. On the other hand, the government could also make the people participate and benefit from this project in a special way.