Involvement of monetary variables in the corona / active fault of price growth

Shahriar Sadeghi: According to economists and experts, the causes that cause inflation in society, or in other words Inflation Instruments are changes in the monetary base and liquidity. Others, of course, follow the trend of money supply Inflation Know effective. In a status report, these three variables are observed until the end of October to show how active the inflation potentials are. According to studies, the highest percentage increase of these three variables from October to October (point to point) compared to the same time period in ten Last year belongs to this year.

First Impression: Monetary base changes

According to Eqtesadnews, the monetary base is one of the main monetary variables Economy The components of the monetary base are coins and banknotes in circulation, as well as deposits of banks and credit institutions with the central bank. Also, the creation of money by the central bank is considered an increase in the monetary base, such as the printing of banknotes. .

Seven-month monetary base changes in 10 years

According to studies conducted from 1990 to 1999 in the period of the first seven months of the year (changes in October compared to March of the previous year), the highest percentage of monetary base growth is related to this year and the year 1991. Over the past ten years, the growth of the monetary base has experienced high fluctuations, in some years the growth of seven months has even been negative, for example, at the end of October 1990, the monetary base has decreased by 4% compared to last March. But in 1991 it hit a record high. After the high increase of this variable in 1991, it has not faced a serious increase in the following years, but after 1996, this increasing trend began, as in the first seven months of this year, the monetary base has increased by 10.2%.

The point-to-point trend of the monetary base in the 1990s

The highest percentage of point-to-point increase in October is the variable of the monetary base during the last ten years with 32% increase in the current year, in other words, this percentage of growth is a record compared to the same period in the last ten years. This variable is exactly like its seven-month growth, although in one year the one-year growth of the monetary base has not been negative, but after experiencing strong growth in 1991, this variable experienced a slight growth and after 1996, it started an upward trend. . Until in October of this year, the monetary base broke its record growth rate in 1991 and recorded the highest growth of this decade in the point-to-point range with 32% growth.

The point of inflation of these variables can be observed in these records, in 91 and 99, which was the highest growth rate of these two indicators, exactly in these two years, the greatest pressure of price increases has been borne on society.

Second impression; liquidity changes

Liquidity consists of two main components: money supply and money supply. The volume of money includes sight deposits, coins and banknotes, and also money supply consists of long-term bank deposits.

Seven months of liquidity change monitoring

Like the monetary base variable, the highest growth rate of the first seven months of the liquidity year from 1390 to 1399 is related to the current year. Since the 90s that sanctions Iran’s economy Followed more seriously, the growth of monetary variables and The inflation rate Among all the first seven months of the last ten years, the growth of liquidity in the first seven months of this year was unprecedented with 19.7 percent. The average growth rate of liquidity from April to October of 90 to 98 is about 12 percent per year. In 1991, when the country was at the peak of sanctions, the growth rate reached 16.6 percent, which in the following years took a downward trend. But in this period, in addition to boycotting the Covid 19 epidemic, it can also be considered involved in this event.

Point-to-point liquidity changes in the last 10 years

The highest one-year growth of liquidity belongs to the years 93 and this year. During the last ten years, the growth of liquidity in the period leading to October has never been lower than 20%, this indicates the high growth of the liquidity variable in Iran’s economy Is. However, the highest rate of liquidity changes in the two-year period occurred in the period ending October this year.


Third impression; changes in money supply

Coins, banknotes and current accounts are the main components of the money supply variable. Money volume due to its high fluidity can have a significant impact on changing the level of prices and inflation.

Monthly changes in money supply

The difference between money supply and liquidity variable is that its growth rate fluctuates in different years. The growth rate of money supply in the first seven months of the year has experienced high fluctuations in the last ten years, so that in some years the growth rate of this variable is very high In some years it has even been negative. For example, in 1992, the growth of money supply from April to October was negative 5.6 percent and the highest growth rate until 1998 was related to 1997 with 24.3 percent. Of course, fluctuations in money supply, which include coins, banknotes and current accounts, are closed. At the demand of cash from society, when expected inflation rises, people try to keep their assets with higher liquidity, for example when inflation was in single digits in 1996 and interest on deposits Banks were also very attractive. People preferred to put most of their assets in the form of long-term deposit accounts, and as a result, the money supply growth rate reached 0.5 percent this year.

It is very important to note the high growth of money supply in the first seven months of this year. While the highest growth that this index had experienced from 1990 to 1998 was 24%, this growth suddenly reached 43% this year. It has grown by 43% in its first year, which is the highest growth rate in the same period in the last ten years. Another point is the higher growth of money supply than liquidity in the last three years. Until 1997, money growth was always less than growth. It has been liquidity, but with rising inflation expectations and inflation since 1997, this has been reversed.

One-year changes in money supply

But the highest and strangest percentage growth point in October was related to the money supply with an increase of 88%. The money supply, which had its highest growth rate of 47.7 percent in 1998, has seen a significant increase in October this year. This variable has faced high growth only in the last three years, while the growth of this variable in 1994 was also negative. This increase in cash demand over the past three years may be due to the declining attractiveness of interest on long-term deposits and the willingness to invest in other capital markets, such as Exchange , Currency and Housing have been. It has also changed the balance of liquidity ratios (money-to-liquidity ratio and quasi-money-to-liquidity ratio), and the money-to-liquidity ratio, which was around 15 percent until last year, rose to 20.6 percent in October this year. Liquidity The power of liquidity has increased.


The trend of increasing four variables in the last ten years

Percentage increase in monetary base, liquidity, money supply and inflation show that all four variables have been increasing over the past year. While in the 90s, the trend of these variables was not completely consistent. In the last ten years, the only year in which the upward trend of these four variables is completely in line with each other and upwards is this year leading to October of this year.

The upward and increasing growth of four important monetary indicators in a current year can be a warning sign about the activity of large inflationary faults.

What are the reasons for the growth of monetary indicators in the current year? Economy Iran to rise? International issues and sanctions, severe budget deficits, the corona epidemic and high expected inflation in society are among the reasons that can be given for the high growth of monetary variables in the past year.


Sanctions and budget deficits

International sanctions against Iran, which have intensified in the past few years and have caused many problems for the Iranian economy. One of the problems that has plagued the Iranian economy more severely than in the past two years is the budget deficit. Sanctions have led to a sharp drop in oil sales, one of the country’s main sources of revenue, in recent years, making it difficult for the government to fund itself. This has led the government to make up for its budget deficit. National Development withdraws and this withdrawal from the fund by the Central Bank was converted into Rials at the rate of Nima. As a result, with the creation of new money by the Central Bank, the monetary base increased, followed by other monetary variables such as liquidity and money supply in society. Became more.


Influence of monetary variables on the corona

The corona epidemic also led to the release of part of the banks’ legal deposits with the central bank with the aim of crisis management. As a result of this policy, the increasing liquidity ratio increased with the increasing liquidity ratio of credit injected into the Iranian economy. As a result, much of the record-breaking in October stems from these policies.


High expected inflation and increasing coefficient

One of the destructive effects of expected inflation in the first seven months of the year was a high increase in the coefficient of growth (money creation by banks). In other words, when expected inflation rises in society, the amount of bank facilities increases because of high inflation forecast. In society, the real interest rate is negative. This causes more demand for loans from banks so that these loans enter the investment markets. Because it is predicted that the profitability of these markets is higher than the interest rate of repayment of facilities, and with this event, the speed of lending by banks will increase and more money will be created by banks, which will increase monetary variables. While the average incremental multiplication from 1990 to 1997 was around 6, in September this year the number reached 7.7, which indicates the creation of more money by banks in recent months. In this area some growth experts Exchange Is also considered as one of the factors of big changes in liquidity. With the increase in banks ‘lending to brokerages and the diversion of loans to the stock market, a large part of these loans returned to banks in the form of deposits, but because the corresponding deposits were not deposited with the central bank, the banks’ debt to The central bank was effective and itself expanded the monetary base.

Is inflation still threatening Iran’s economy?

It is still a little early to answer this question, but some experts emphasize that high expected inflation in society will not continue any longer because the high level of expected inflation among the people due to some uncertainties. Political economy With Trump’s ouster and the election of a Democratic candidate in the United States, and speculation about a policy adjustment, the maximum pressure of expected inflation in society will decrease. Because many economic entities think that the outlook will not be worse than before and even openings are on the way. However, some other experts point out that this event weakens the potentials and point to the situation of actual potentials in the Iranian economy and emphasize that the current situation is risky in any case and if the current trend is not managed, it can cause Return expectations. Therefore, the government and other economic institutions should help the central bank to moderate the effect of inflationary variables by the end of October.

Inflation poison to be taken budget!

One of the priority projects to manage inflation is the budget. The government and parliament must determine the budget for next year along with the realities of the economy and the country. If budget resources and expenditures fail to reduce the engine of liquidity to finance costs, the current potential and the events ahead, even with political openings, will have a negative impact on the Iranian economy.

Interest rate antidote

One of the variables that can help manage liquidity is correction Interest rate Is the most important economic variable. According to current inflation rates Interest rate The hook must be restrained. Naturally, adjusting the rate in a way that enhances the attractiveness of keeping money in the form of bank deposits and quasi-cash assets is effective in liquidity and inflation.

The average long-term inflation rate in Iran has been about 20 percent, while the average inflation rate in 2018 in the world was 2.4 percent, which indicates the solution of the inflation problem in many countries. Iran after Venezuela, Zimbabwe and Argentina It ranks fourth in world inflation. One of the issues that has caused in Iran The inflation rate Unresolved economic reforms such as budget structure and interest rates. Reforms that have become more necessary due to the situation of inflationary variables.