Government Budget Debt Compensation Strategies / Negative Consequences of Borrowing

Dr. Seyed Bahauddin Hosseini Hashemi, a senior banking expert, in an interview with IBNA, stressed that one of the problems of increasing liquidity and, consequently, increasing inflation is the increase of the monetary base without compensation, said: The monetary base has several components; Part of it is the central bank’s claims on the government and state-owned companies. Another part is the claims of the central bank from the banks, which are the two negative parts of the monetary base, and the third part is the net foreign assets, which is a good part, because the higher our foreign exchange earnings and the positive foreign balance, the monetary base Increases from the location of the real banknote.

According to Hosseini Hashemi, the first two components, if increased unnecessarily, will increase liquidity without the existence of goods and services, and due to the fact that banks also have the power to make money through bank loans (through the increasing monetary coefficient), They increase liquidity sharply, and increasing liquidity causes inflation.

He added: “Basically, any government that has a budget deficit, the probability and risk of borrowing from the central bank is very high.” Especially since in the short term the government may not be able to finance the budget deficit through other methods.

However, there are other ways to cover the budget deficit, for example, the government can issue bonds or treasury bonds or bonds or sell its assets. Of course, these have limitations and capacity, and market acceptance is important, because the interest rates on bank deposits and our interbank rates are not normal, so bond rates are so high that buyers are not attracted to buy the bonds. Also, the operations market is still not deep enough to encourage so-called banks to come and buy these securities.

Regarding borrowing from the banking network, he said: “For example, state-owned companies do not settle their debts to banks from the issuance of previous participation bonds, which leads to borrowing from the central bank and, as a result, causes Increases the monetary base, increases liquidity and increases inflation.

The economist added: “In the positive case, when the monetary base increases from the net of foreign assets, it means that we sold more oil, we had more exports, now we have more currency, so the equivalent in Rials should be printed and liquidity should be published. Between prices, otherwise it will cause a recession.

But when the government and the banks have overdrafts due to the budget deficit, because the equivalent is not produced in return and there are no goods in the market and no services are added, this causes the previous prices to increase. In other words, the volume of money multiplied by the velocity of money circulation is equal to the total volume of GDP multiplied by the general and average prices. As a result, when the volume of liquidity rises but beyond that, the volume of GDP does not rise, the price rises in order to maintain balance.

Regarding the government’s borrowing mechanism from the central bank using mandatory facilities, he said: “These facilities are in the budget notes, for example, suppose for agriculture, it is determined that a certain amount of facilities will be paid to farmers through the banking network with government guarantees.”

Hosseini Hashemi concluded by pointing to the negative consequences of borrowing from the Central Bank on the country’s economy: The government can spend money that is either from taxes or from the sale of assets such as oil. That is, he sold a good and received money. But when he borrows from the banking system, he actually receives money for which he has not offered any goods or services, which in turn raises prices in the market.