A ‘tsunami’ of cash: In a slowing economy, Iran faces a dilemma with growing liquidity
Economics professor Mohammad Qoli Yussefi said trying to control liquidity is "like prescribing an overweight person to stop eating in order to get into shape." (AFP/File)
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Governor of the Central Bank of Iran Valiollah Seif says liquidity growth is in check but some economists warn of a “tsunami” of cash which is inundating the market.
According to the governor, Iran saw off the year on March 21 with a 21.2 percent growth of liquidity which snowballed to around 7 trillion rials ($250 billion).
It was an improvement of half a percentage point on the month before when the liquidity volume grew 21.7 percent.
Under former President Mahmoud Ahmadinejad, the money supply grew six-fold, which saw the inflation rate shoot through the roof above 40 percent.
Ahmadinejad’s eight years in office marked Iran’s record inflow of oil dollars but he profusely used the money in a series of projects which barely paid any dividends.
The current government has tamed inflation, bringing it down to around 15 percent but economists cannot understand how it has happened while the capital volume keeps growing.
Normally, the cash flow is not a bad thing but it becomes a burden when it trickles into the non-productive sector, leading to stagflation. That’s exactly what has happened to the Iranian economy.
The manufacturing sector instead is faced with a shortage of financial facilities and a slew of other problems, including low productivity and the high cost of production.
Mohammad Qoli Yussefi, a professor of economics, says with the double whammy of inflation and recession, the priority for Iran must be to wade out of the stagnation first.
“We cannot jeopardize production, employment and social welfare under the pretext of slimming the economy. This is like prescribing an overweight person to stop eating in order to get into shape,” he said.
Yussefi warned that government’s measures to control liquidity is threatening the manufacturing, industrial and agricultural sectors with shortages of credit and exacerbating recession.
One of the key problems is that the Iranian consumers get a little piece of the ballooning liquidity pie which otherwise would have helped demand and shored up the economy.
While the manufacturing sector is grappling with the credit crunch, banks and credit institutions are holding the bulk of the financial capital and using it in an unregulated manner.
In recent years, credit institutions and private banks have mushroomed in Iran, using liquidity to generate more money without producing anything real.
The government has gone to great lengths recently to force them to cut their interest rates which economists warn could deal a fatal blow to the manufacturing sector if they are not confronted.
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