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Iranian Banks’ Debt to Central Bank Soars Amid Unchecked Money Printing

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Three-minute read

The exponential rise in Iranian banks’ debt to the Central Bank over the past two years rings alarm bells for the country’s economy, a result of unchecked money printing and a lack of financial oversight.

Iran has been grappling with serious economic challenges in recent years, and one of the most pressing issues has been the surge in money printing and banks’ indebtedness to the Central Bank. The escalating debt of banks to the Central Bank over the past two years has become a cause for concern, indicating deep-seated problems within the country’s financial system.

Recent reports show that Iranian banks’ debt to the Central Bank has grown by an alarming 100 percent. This debt, which stood at zero percent in the month of August 2023, surged to 98.3 percent by 2023, during Ebrahim Raisi’s tenure as the regime’s president. Moreover, these debts accounted for 41.8 percent of the monetary base growth, showing a worrying trend.

These figures underscore the liquidity challenges faced by banks. Recently, the Central Bank published statistics on the monetary base until the end of February, indicating that the monetary base had reached 1,048 trillion tomans, of which 682 trillion tomans, or 65.1 percent, belonged to banks’ debts to the Central Bank.

The year-on-year growth in banks’ debt to the Central Bank in February increased by 98.3 percent compared to the same month last year.

The rampant printing of money has contributed to the surge in banks’ debt to the Central Bank. With increased money printing, inflation ensues, and the value of the currency diminishes, leading to a decrease in people’s purchasing power and no improvement in the financial system. Additionally, the increase in banks’ debt to the Central Bank indicates banks’ inability to attract financial resources and manage their resources properly.

In the past year, banks’ debt to the Central Bank has doubled. The highest growth rate occurred in August 2023, registering at 214 percent. Comparing this growth with the growth of the monetary base indicates that banks’ debt to the Central Bank has increased at a faster pace.

Since the beginning of 2021, the average growth rate of the monetary base in Iran has been 35.8%. Over the same period, the average growth rate of Iranian banks’ debt to the central bank has been close to 78% – nearly double the pace of monetary base expansion.

This analysis indicates that the rapid increase in banks’ debt has been a significant driver of the overall growth in the money supply. As Iranian banks have faced liquidity shortages in meeting their obligations, they have turned to the Central Bank, using government securities as collateral to obtain heavy loans.

One of the primary factors behind this surge in banks borrowing from the Central Bank appears to be the expansion of money printing. Increased money creation has fueled inflation and eroded the purchasing power of the Iranian currency. This has left the financial system struggling, with banks unable to attract sufficient financial resources and manage their liquidity effectively.

The escalating liquidity expansion in Iran’s banking sector, coupled with the central bank’s accommodative monetary policy, has created a concerning dynamic. The rapid growth in banks’ debt levels, nearly double that of the monetary base, suggests significant strains within the Iranian financial system. This can erode public trust in banks and even lead to a banking crisis. Moreover, this situation can have negative effects on economic growth and development, leading to a reduction in investments and economic instability.

The unchecked growth of these loans, known for borrowing from the Central Bank, will have adverse consequences. The first effect of this is an increase in the monetary base and, consequently, an intensification of inflation, which reduces household budgets and severely reduces people’s purchasing power.

On the other hand, the increasing reliance of banks on Central Bank resources also undermines their independence and efficiency. Banks, trapped in debt, neglect their core duties of allocating resources optimally and equipping productive enterprises, instead becoming intermediaries for financial institutions.

A significant portion of banks’ debt to the Central Bank is due to the government’s debt to the banking system. The lack of transparency in government financial performance and the concealment of budget deficits are the root causes of this problem.

The current structure of the banking system faces multiple challenges, including financial imbalance, mismanagement, and concentration of power in certain banks. As the clerical regime neglects investments in vital infrastructures, including the fiscal system, the state is poised for a serious confrontation with its population. Many officials and experts are already sounding the alarm about the impending collapse of the monetary system.

A member of the regime’s parliament, Lotfollah Siahkali, warned about the economic and monetary pressure on the people, acknowledging that the government consistently taps into the people’s pockets to cover its budget shortfalls. He stated, “If the price of each dollar reaches 90,000 to 100,000  tomans, we must consider the inevitable collapse of the economy. People’s pockets have nothing left to empty; they are torn apart.”