Mazaheri Targets One-Digit Inflation

Based on estimates, the payments of the Central Bank of Iran and its granted credits will increase liquidity with an index of about 3.5

The Minister of Economic Affairs and Finance has made four proposals to the Governor of the Central Bank of Iran for controlling inflation rate and bringing it down to a one-digit figure.

The first proposal of Mazaheri pointed to funds settled to Treasury by the Central Bank of Iran. He reflects: "Supply and payment of funds that are directly settled to Treasury by the Central Bank of Iran (such as those stipulated by clause M of Note 21) should be gradual and continuous based on prior coordination, so that, the process would entail minimum growth of monetary basis and do not lead to aggravation of inflation, especially during the second half of the year."

In his second proposal to Sheibani, Mazaheri says, "A directive has been issued requesting all bank managers, including state-run and private, to observe regulations regarding obligatory ratios of facilities and credits, evaluation of justifiable projects, assessing credit of clients as well as more seriousness for collecting liabilities from clients. The supervisory management of banks must make more accurate plans for optimal implementation of these points and guarantee their full implementation by taking advantage of relevant legal tools."

Mazaheri has noted that, "I, on behalf of the general assemblies of state-run banks, am ready to cooperate for the implementation of the above measures."

Mazaheri’s third proposal pertains to increased liquidity and its collection. In this regard, Mazaheri wrote, "The credits and payments of the Central Bank of Iran and the banking system increase monetary basis and lead to creation of more money and increased liquidity. Based on available estimates, the payments of the Central Bank of Iran and its granted credits will increase liquidity with an index of about 3.5."

The Money and Credit Council has commissioned the Central Bank of Iran to publish participation bonds in order to collect the liquidity and decrease its turnover. Mazaheri believes that this method is effective and efficient for decreasing liquidity. However, it is costly and its cost, with a heavy 17% per diem rate which is cumulative and increases on a daily basis, puts pressure on the balance sheet of the Central Bank of Iran and practically reduces government’s revenues, which would in turn, lead to budget deficit and exacerbation of inflation. Therefore, paying the cost by the Central Bank of Iran would not be possible according to a medium-term projection.

The Minister of Economic Affairs and Finance pointed out in his letter that another problem with publishing bonds was the cost of printing, distribution and publicity for bonds. Finally, the main negative point of publishing such bonds was reducing motivation for investment in the society and directing capitals of real and legal entities toward purchasing bonds to take advantage of their benefits including high profit, high liquidity, zero taxation and zero risk taking. Despite all these issues, the Money and Credit Council, Central Bank of Iran and Ministry of Economic Affairs and Finance have accepted and tolerated all these negative consequences for a more lofty expediency which is controlling inflation and reducing liquidity. The minister of Economic Affairs and Finance proposes that to solve the problem, a more efficient, less expensive and less damaging method that is, increase in legal deposits of banks should be used.

Based on this proposal, the increase in legal deposit and interest rate paid to banks could be evaluated and the interest paid on legal deposits of banks might be increased from 0.9% to 3-5 percent. This tool could be used to create more cooperation and partnership among banks."

Mazaheri believes that if this proposal is put into action, a positive result would be that for every unit of liquidity amassed through legal deposit, the liquidity in the society would decrease by about 3.5 times and untoward effects of publishing bonds would be offset. This method will naturally direct the banks toward better management of their deposits.

The last proposal made by Mazaheri is related to organizing non-organized monetary institutes.