January 2012, No. 62

Economy

500% Growth in Liquidity

A drop in banking interest rates would result in withdrawal of cash deposits from banks and the money would be directed towards other markets.

While stressing that the government is paying attention to checking liquidity more than ever, the minister of finance and economic affairs noted that the point which is highly underlined at the Money and Credit Council is that efforts should be made to direct the liquidity towards productive activities. "We are particularly trying to move the liquidity in the labor and capital market. Besides, we should block the way to speculation and create a healthy flow of money," said the minister.

Explanations offered by the economy minister on government's efforts to control liquidity come at a time that in the past six years liquidity index has taken an upward trend which is contrary to the trend of the index for economic growth in our country. Definition of a dynamic economy is as such that economic growth and liquidity growth should be proportional. According to statistical reports issued by the Central Bank, the process of liquidity study in our county since 2005 till now shows that the liquidity volume in the calendar month of Mordad 1384 (July/August, 2005) stood at 700 thousand billion rials, in 2006 more than 1,900 thousand billion rials and by the end of 2009 it was 2,350 thousand billion rials. The figure amounted to over 2,700 thousand billion rials by the end of the calendar month of Azar 1389 (November/December 2010).

But the latest liquidity figure announced by the economy minister was 3,500 thousand billion rials since the month of Azar till now. Therefore, liquidity since the month of Mordad 1384 (2005) up to now has registered a growth of over 500%. In fact, according to the economy minister at present the liquidity in the society is 300 thousand billion rials more than what has been announced by the Central Bank.

The rise in liquidity growth is constantly taking an upward trend in the 10^th government compared to the 9^th government and despite current implementation of the subsidy reform plan the government should take measures in order to prevent liquidity growth. However, the administration has not put a specific plan into effect and even by adopting expansionary policies has fuelled further growth of liquidity.

In economy, liquidity refers to the total money and quasi money which have a direct relationship with inflation, because when liquidity goes up more commodities and services should be offered to the society proportionally and since the volume of commodities and services is limited therefore the liquidity volume should equal the amount of commodities and services.

If such a balance fails to stand and the amount of liquidity grows excessively and surpasses the volume of commodities and services in the society, then inflation will go up. With the implementation of the law on targeted subsidies and paying households cash subsidies, the amount of liquidity has naturally increased in the society. Additionally, the government regulated its monetary policies in the current year in the expansionary form and thus we are witnessing an inflationary stagnation.

Liquidity: An Unending Tale in Foreign Currency and Gold Markets

Symptoms of this condition could be traced in gold and foreign currency markets as well as in recent developments of the two markets. The gold market in Iran, especially transaction of gold coins, has always maintained its attraction and risks as an indicator of transition of fluid and volatile liquidity in the society to such an extent that in the gold coin and currency markets and due to severe price fluctuations, the government has inevitably intervened and through the Central Bank has injected dollar and coin.

Hamid Tehranfar, former director general of the Central Bank Department for Supervision of Banks and Credit Institutions, admitting the trend says: "A drop in banking interest rates would result in withdrawal of cash deposits from banks and the money would be directed towards other markets. People are after investment with higher interests and for this reason when they do not get their desired interest from banks they would refer to other markets. Since the capital market has not been able to attract people's full trust, liquidity is wandering and leading towards currency and gold markets." He further remarked that currency market due to its special fluctuations and because it has not the necessary attraction for ordinary people would divert liquidity towards the gold market. Although the currency market these days has found the required attraction for the public, however liquidity is flowing towards the gold market.

Cash Subsidy, Lower Banking Interest Rates Cause Liquidity Growth: The targeted subsidies plan is under implementation and price of the gold coin in the market, as an example of Iran's economic situation, was much higher than its global price. Some people consider it "bubble growth" while others link it to the increase of liquidity in the market. One of the reasons for the increase in liquidity is lower banking interest rates and the other reason is payment of cash subsidies.

Mehdi Taqavi, a lecturer at Allameh Tabatabai University in Tehran, says: "The constant increase in prices is the analysis many capitalists and people have in such circumstances and this issue turns into a wave to encourage the desire for buying gold and gold coins. This would increase demand in the market and would falsely push up prices. Recently, the wandering cash subsidies, no matter how small, have been effective in price hikes." He also pointed to the withdrawal of capital from stock and housing markets and its entry into the attractive and growing gold market as another factor for creating bubbles in the gold and gold coin market. He said: "At present the housing market and other financial markets are not attractive enough for absorbing capital." 

Gross Difference between Economic Growth and Liquidity Growth Rates: According to an expert, in a healthy and dynamic economy the rate of liquidity growth should be proportional with the rate of economic growth. This is at a time that in the past three years the economic growth rate in our country has been eliminated from the official site of the Central Bank of Iran and only individual economy officials would cite a number verbally as the rate of economic growth.

Last year the economy minister put the economic growth rate at close to 10%! But the International Monetary Fund had announced that Iran's economic growth rate would stand at zero in the current year! Now for the strange numbers on Iran's economic growth rate for the approval of which there is no reliable document, the liquidity growth rate is steeply taking an upward trend.

Commenting on this issue, the economic expert says: "The liquidity available in the society is absorbed by the markets which have no products, towards currency, gold, housing, and speculation – markets which only fuel increased supply and demand which have no result but inflation, reduction in production and bankruptcy of manufacturing plants."

In conclusion Taqavi stressed that the low economic growth rate is the reason for not announcing it, adding that when there is no economic growth rate no one would realize the wide gap between liquidity growth and economic growth rates.