Dangerous Growth of Government Debt to the Banking System

The Open Data Iran database is an innovation project aimed at collecting data related to Iran in one place and presenting it in easily accessible formats. Radio Farda, in collaboration with this entity, publishes a series of articles. An examination of government debts to the banking network and the central bank shows that despite the seemingly stable economic situation and inflation control during Hassan Rouhani's administration, a significant event is occurring in the banking system, which is one of the main sources of financing for Iran's economy. Although the onset of this event did not begin during the eleventh government, its intensification during this period and the lack of control over it in the future could have major consequences. The government is becoming increasingly indebted. Regardless of the political changes in the past decade, available data shows that government debt to the banking system has always been increasing. In the year 1393 (2014), the total government debt to the central bank and banks surpassed 100 trillion tomans for the first time, rising from 89 trillion tomans to 119 trillion tomans, and in 1394 (2015), this figure increased to 144 trillion tomans. But what do these figures mean and what are their implications? Here, we must separate the government's debt to banks and the central bank, as each has separate implications. Except for the years 1386 and 1387 (2007-2008), when government debt to the central bank experienced a slight decrease of about six to seven percent, and in 1390 (2011) when there was an extraordinary 46 percent decrease, in other years, government debt to the central bank has always been on the rise. We observe the peak of this increase in 1389 (2010) with nearly an 88 percent jump. Government debt to banks has been increasing at a faster pace. Unlike the economies of developed countries where the capital market or stock exchange takes on this role, the government, like other sectors, when faced with a decrease in resources, turns to banks as the first option for covering deficits. However, there is a major difference between the non-governmental sectors and the government. When non-governmental sectors take loans from banks, these loans are transparently recorded in their financial statements. But when the government does this, based on the methods of financial statement preparation in Iran, this loan is included in the bank's assets. In other words, artificially and on paper, this loan does not seem too bad for the banks, but in reality, a portion of the banks' assets becomes locked in this way. But what is the result? To compensate for the assets that are locked in the form of government debt—alongside the banks' poor performance and their increasing debts to the central bank—banks are forced to encourage people to deposit by offering high-interest rates. This leads to liquidity being indirectly diverted from production and flowing into banks. Instead of directing these deposits towards production, banks lend them to the government or sectors of the economy that can afford to pay high interest, in order to compensate for reduced revenues. This is a cycle that keeps repeating. If people's assets are to move towards production, banks become incapacitated, and if assets remain in banks, the economy will not recover from recession. According to the central bank's announcement at the end of 1394 (2015), the volume of liquidity surpassed 1,017 trillion tomans, of which 881 trillion tomans was in the form of quasi-money, meaning sight deposits in banks or term deposits. The outflow of people's deposits from banks and the influx of this large volume of money into other sectors could lead to a catastrophic inflationary situation. In the chart below, you can see the changes in liquidity over the past decade along with the government debt to banks and the central bank. These debts and liquidity have been growing in a stepwise manner. While the monetary sector has been inflating, negative or very slight economic growth indicates the poor condition of the country's economy. In the situation we are witnessing, the government injects money into the economy through the central bank and banks to compensate for financial deficits, but banks, to compensate for their own financial shortages and poor performance, trap that money with high-interest offers. The economic recession also helps, and a large portion of the money exits the form of cash and re-enters the banking network as 'quasi-money' to create more money. On paper and in financial statements, banks' assets have increased and inflation has been controlled, but in reality, a volcano is becoming increasingly active every day.