The destructive effect of central bank policies to curb liquidity

The year 1401 ended while the liquidity growth rate was recorded as 31.1% in March of that year. A figure that, despite the decrease of 7.9 percentage points compared to 1400, exceeded the 30% target set by the Central Bank for liquidity growth by the end of the year.

But at the beginning of 1402, the Central Bank set a 25% target for liquidity growth by the end of the year; A goal that is still high and will lead to high inflation. Nevertheless, achieving the same goal seems difficult but promising considering the economic and political limitations, especially the country’s embargo conditions. Because the realization of this goal can be a step forward for the realization of the central bank’s goals in the future.

Now, half of the year 1402 has passed, the published statistics and figures indicate that the trend of liquidity growth during this period has been according to the Central Bank’s wishes. In such a way that with the continuation of the current trend, the growth rate of liquidity will be lower than the targeted rate of 25% by the end of the year.

Nevertheless, the important question is how the central bank curbed the growth of liquidity and what will be the long-term effects of this bank’s policies on the economy?

The liquidity brake was pulled in 1402

The latest published report on the country’s liquidity situation is from August this year. However, checking the Central Bank data from the beginning of this year show that the liquidity growth rate in April this year compared to March last year was 1.3%, while this figure was negative 0.2% in April last year.

Despite the higher growth rate of liquidity at the beginning of 1402 compared to 1401, the softening increase of liquidity caused the sheet to return in the rest of the year. So that the 5-month growth rate of liquidity in August of this year was equal to 8.1%, while this figure was equal to 11.8% in the last year.

Therefore, the rate of liquidity growth until the end of August has not only been slower than last year, but it has also been lower than the target rate for the five-month period by about two percent.

Even though the central bank did not announce the amount of liquidity in the economy in its August report, but according to the record of 6,337,000 billion tomans for liquidity in March of last year and the 8.1% growth rate of this variable since the beginning of the year, it is estimated It is possible that the volume of liquidity has reached 6,850 billion tomans at the end of August.

In addition, according to the statistics of the Central Bank, the annual growth rate of liquidity in August has recorded a figure of 26.9%, with a decrease of 10.9% compared to the same period last year.

Comparison of liquidity growth rate in 1401 and 1402

How did the central bank restrain the growth of liquidity?

As the central bank says, the reason for the decrease in liquidity in the first half of 1402 was the plan to control the growth of the balance sheet of banks and credit institutions and to fine the banks that violated the limits by increasing the legal deposit ratio.

The increase in the legal deposit rate of banks has caused the increasing coefficient of conversion of the monetary base to liquidity to decrease and the growth of liquidity to slow down. In fact, by applying this policy, domestic monetary resources are used for fewer transactions.

Nevertheless, experts believe that although this policy can curb inflation to some extent in the short term, it will have destructive effects on the economy in the long run.

Is a recession coming?

The freezing of financial resources in banks, despite the high inflation rates in Iran’s economy, can cause stagnation. Because with inflation at 40% levels, all goods and services in the economy need 40% more liquidity for transactions, but this required liquidity is confined in banks.

On the other hand, in this situation, the producer of the product cannot sell his goods and therefore reduces the production. As a result, employment also decreases.

This possible recession can force the government to consume the saved financial resources in the second 6 months of the year and create an inflationary capacity for the future period.

For this reason, economic experts say that the actions of the central bank to curb inflation by reducing the growth rate of liquidity should be accompanied by complementary policies to leave positive effects.

Experts believe that this complementary policy should be an effort to reform the budget structure and eliminate the government’s unproductive budget in order to address one of the main roots of Iran’s rampant inflation.