Central Bank Emphasizes 'Changing Liquidity Composition' to Achieve 'Production Boom' Goal

Abdolnaser Hemmati, the Governor of the Central Bank of Iran, announced on Friday, April 9, in an Instagram note: "The Central Bank has put the change in the composition of monetary quantities on its agenda to direct liquidity towards boosting production." In this brief Instagram note, the Central Bank Governor referred to the "roots of the recent inflation shock" and emphasized that alongside the "policy related to the exchange rate," the current appropriate "monetary policy" is to "change the composition of monetary quantities to avoid recession and move towards production boom." According to Abdolnaser Hemmati, the goal of implementing this policy is to "reduce inflationary pressure by increasing supply." The Statistical Center reported the inflation rate for the year 1397 (2018) to be around 27 percent. At the beginning of his note, the Central Bank Governor defined the concept of liquidity, stating: "A significant portion of the liquidity volume has now turned into loans, whether productive or not, or has been converted by the banks into various other assets, most of which do not align with achieving optimal social goals and need reform." This statement from the Central Bank Governor may relate to experts' criticisms regarding the accumulation of toxic assets in banks, which have been frequently mentioned in recent years. Political and economic officials, including Hassan Rouhani, the President of Iran, have repeatedly spoken about the necessity of divesting surplus assets and selling bank buildings. In recent years, banks have entered the housing and construction market, disrupting the relations in this sector, and have been unable to sell their buildings due to the recession in the construction and housing sector, leading to these assets being categorized as frozen or toxic assets. Although they are accounted for in the banks' financial statements, they do not have capital turnover capacity. Another point mentioned in Abdolnaser Hemmati's note is the rational behavior of liquidity. According to Hemmati, "liquidity concentrates in sectors that have the highest net return from risk." With this introduction, the Central Bank Governor stated that if liquidity is to be directed towards production, "the return on the production sector must increase through improving the business environment, reducing production costs, increasing people's purchasing power for demand, and growing exports to create the necessary motivation for investment leading to a production boom." What are the obstacles to 'production boom' in Iran? In the latest report from the Central Bank regarding major monetary and banking figures, which relates to the end of the last year, the liquidity figure reached 1,765 trillion tomans at the end of the first nine months of last year. The liquidity figure at the end of the last year experienced a growth of 15.3 percent compared to the end of 1396 (2017), which, although slower than the growth rates of previous years, was still considered a high growth rate. The composition of liquidity is generally interpreted as the volume of money and quasi-money in the economy. In recent years, the composition of liquidity has shifted in favor of quasi-money, which refers to time deposits in banks, while the growth of money, including banknotes and coins in people's hands and current bank deposits, has been lower. Hossein Abdeh Tabrizi, an economist and member of the Supreme Council of the Stock Exchange, who was an economic advisor to the Ministry of Housing and Urban Development during Abbas Akhoundi's term, named the "intensification of the liquidity production rate, which is a precursor to inflation," as "the most serious challenge and main concern of the Iranian economy" in the year 1398 (2019). Liquidity is generally produced through the government's budget deficit and the way this deficit is financed through borrowing from the Central Bank, banks' debts to the Central Bank, and the banking network's overdraft from the Central Bank. If the movement of liquidity and gross domestic product is proportional, liquidity growth will not be crisis-inducing; however, the approximately 30 percent growth in liquidity in all previous years, which in some cases and years has seen negative economic growth, will exacerbate inflation.