Regarding the advantages and disadvantages of settling the government’s debt to banks from the currency exchange rate in the Central Bank’s balance sheet
Last Friday, a meeting was held with top managers of one of the country’s privatized banks, focusing on open market operations, and the scope of the discussion was on currency exchange in the balance sheets of the central bank and commercial banks.
Ironically, these banks have always been in the news in recent weeks with the issue of revaluation of assets based on exchange rates.
We remember that the government can use the exchange rate mechanism to settle its debts to commercial banks. In this case, the rial resources obtained from the exchange rate are used by the government to pay its debt to the banks, and the banks use the same resources to pay their debt to the central bank.
But at first glance, it may seem that clearing the government’s debts with commercial banks through the income from the increase in the exchange rate (exchange rate), is not much different from the government borrowing from the central bank and wanting to pay its debt to creditor banks. In fact, open market operations can be nothing but the transfer of the government’s debt to the central bank’s balance sheet assets and the reduction of the banks’ debt to the central bank.
However, the 11th principle of the operation of modern central banks acknowledges that open market operations are more aimed at controlling interest rates than government borrowing for inevitable payments. The principle that the possibility of implementing it with such a defective structure in Iran is questionable and it seems that unlike the usual practice in advanced economies, government borrowing is a priority.
But you can look at the matter from another point of view. The need to increase the government’s debt to the central bank during the path of economic growth and in order to finance the #cheap price of deposits required by banks in the current conditions is much, much less expensive than 34% overdraft and 18% credit line.
In any case, don’t forget that the money that the government borrows from the central bank (directly and indirectly) is a monetary base and is used by banks to pay legal deposits and settle in the clearing room. That too, in the conditions where banks badly need this kind of cheap money and feel the lack of it.
In any case, the active injection of the monetary base itself can be a place to reduce the interest rate in the economy, but in any case, if this (debt settlement from the currency exchange rate) is accompanied by an unbridled increase in the exchange rate by the government, inflation is also an inevitable part of the economy. It will be a crisis.
It seems that if the country’s economy does not face economic sanctions and the inevitable increase in the exchange rate, in comparison, if instead of following this path from the beginning, the government would spend correctly and productively with figures similar to the current clearing with banks, by borrowing from the central bank. Money would come in the form of construction budgets and giving banks access to the required reserves (if the government really has a productive incentive!), more economic activity would occur in the economy, and unreasonable interest rate competition would not occur to attract deposits among banks.
Abbas Dadjovi Tavakoli
# Specialized session of open market operations
@interestratemoney
This post is written by Desdoniva