An Examination of the Country’s Liquidity Status, the Challenges Ahead in Liquidity Control, and Policy Recommendations in This Area
Abstract
In recent years, one of the most significant economic challenges facing Iran has been the unchecked growth of liquidity and its consequences, including inflation and the depreciation of the national currency. This issue has prompted economic policymakers and the Central Bank to seek solutions for controlling liquidity growth and establishing stability in the economic environment. One of the key tools proposed in this regard has been balance sheet control of banks, which has been adopted as a strategy for managing liquidity within the country’s monetary and banking system. Accordingly, the Central Bank succeeded in achieving its targeted levels for monetary base and liquidity growth by the end of 1402 (March 2024). However, during the first eight months of 1403 (March–November 2024), the Central Bank was unable to meet its objectives.
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Liquidity Trends in the 1390s and 1400s (2010s and 2020s): Iran’s liquidity growth surged after 2018 due to sanctions, prompting the Central Bank to adopt balance sheet controls in 2020. While this initially slowed growth, liquidity peaked in 2021 and then declined to 24% by early 2024. However, it rose again to 28.1% by late 2024, despite banking restrictions—indicating renewed monetary pressures.
Examining the Reasons Behind Liquidity Control
The recent slowdown in Iran’s liquidity growth stems from two key factors:
- Lower monetary base growth due to reduced net foreign assets, higher government deposits at the Central Bank, and bond sales.
- Strict balance sheet controls on banks, with monthly monitoring and penalties for excessive asset growth.
These measures have been effective over the past three years, though their continuation remains under discussion.
Challenges Ahead
Key challenges in Iran’s monetary system include:
- Maintaining low liquidity growth requires more than just balance sheet control; relying solely on this policy could lead to stagnation.
- Interest rate disparities between the interbank market and competing markets have led banks with surplus funds to avoid the interbank market, opting for higher-yield investments instead.
- 3.Increased bank debt to the Central Bank, seen across all banking groups in 2022 and 2023, is a growing concern.
Policy recommendations to improve liquidity control include:
- Increase interbank interest rates while expanding Central Bank operations, and limit bank balance sheet growth simultaneously.
- Direct loans to national priority projects (e.g., housing) and SMEs to boost short-term economic impact.
- Condition banks’ overdrafts from the Central Bank, but ensure banking reforms provide enough assets for purchasing government securities before implementing this policy.
This study was conducted at Money and Currency Think Tank in collaboration with Morteza Abdolhosseini and Hossein Jafari in 2023.
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