Negative effects of government borrowing from the central bank for the economy

In an interview with IBNA, Morteza Emadzadeh, an expert on economic issues, said, referring to the harmful economic consequences of government borrowing from the Central Bank: That is, liquidity is collected and given to policymakers and the government.

He added: ‌ Selling bonds is an anti-inflationary move because it reduces demand and removes liquidity from the people. Emadzadeh criticized the borrowing plan from the Central Bank as one of the possible options to cover the government budget deficit, noting: ‌ In the current situation, it would not be wise and correct to raise the issue of borrowing from the Central Bank and provide resources in our country. In order to cover the deficit from the sale of participation bonds or other securities, the budget is less harmful and causes liquidity and money to be lost from the people and reduces the inflationary pressure.

The economic affairs expert clarified about the forecast of people’s acceptance to buy participation bonds: مشار Participation bonds have a fixed annual interest rate, and if the appropriate interest rate is determined, it seems that it will be welcomed by the people and can be effective in solving government problems. What is certain is that the interest rate should be set higher than the approved bank interest rate for these bonds in order to be welcomed by the people.

Emadzadeh pointed out: Of course, if the government succeeds in raising liquidity at a reasonable interest rate to cover its budget deficit, it will benefit greatly from this work; Of course, the repayment of the principal and interest of these bonds is the responsibility of the next government, and perhaps from this perspective, the government is less concerned. Empirically and scientifically, the best way to cover the budget deficit is to sell bonds, which do not create inflationary pressure and do not increase the monetary base.

Referring to the remarks of the Governor of the Central Bank and his warnings about borrowing from the Central Bank to cover the budget deficit, he noted: در It seems that in the remaining months of the government, the Central Bank should show independence and in no way Do not go under the burden of borrowing to the government. Of course, the possibilities of the National Development Fund are also discussed, but it also has inflationary consequences, and the resistance of the central bank will mean that the central bank has fulfilled its mission properly.

The expert on economic issues emphasized: ‌ Issuing participation bonds with appropriate interest rates in the current situation of Iran’s economy is the best way to compensate the government budget deficit and other methods can have many harmful effects on the Iranian economy.

In response to the question, what effect will inflation have on the central bank if it is finally borrowed under pressure? He stated: ‌ One of the most important effects of borrowing is the increase in liquidity, and another harmful effect is that the balance in markets such as the foreign exchange market is disturbed, which can have negative consequences on the prices of other commodities.

Emadzadeh stated that inflation rates have been very high in recent years, adding: کلی The overall inflation rate may increase with any discussion of borrowing, which of course also refers to hyperinflation because if within three consecutive years, the total inflation rate of If it passes 100%, it can be called hyperinflation.

“Iran’s economy has been plagued by high inflation for years,” he said. “Appropriate monetary and fiscal policies, along with fiscal discipline, will prevent inflation from rising.” Therefore, we must be very careful in this regard.