Khamenei Orders Government Not To Pressure Banks For More Money

Iran’s Supreme Leader has ordered the parliament and the government not to overburden banks by unreasonable demands, since it would lead to printing more money.

In January, the minister of economy ordered all government-owned banks to pay up to $4,000 in small loans to salaried people without a guarantor or collateral. The decision came as four years of high double-digit inflation has impoverished the middle class and the new government, having had made lofty promises last year, felt obliged to make a gesture.

On Monday, Speaker of Parliament Mohammad Bagher Ghalibaf informed lawmakers that he received a letter from Khamenei asking the legislature and the presidential administration not to demand payments by banks that are beyond their financial resources to fulfill.

Ghalibaf said that when the government or parliament make decisions asking banks to undertake additional obligations, it simply forces the financial institutions to turn to the Central Bank of Iran (CBI), which in turn must print more money. This leads to even more inflation, which has already been hovering around 40 percent since 2021.

The Speaker pointed at CBI chief’s remarks on Sunday that the banks and the central bank are not able to finance new programs without pushing inflation higher.

Banks in Iran are kept afloat by the CBI and in most cases are heavily indebted, while the government also has a 50-percent budget deficit.

Just in the past six months, liquidity jumped by $14 billion, CBI announced earlier this month. Last October, the CBI reported that liquidity had increased eightfold since 2013. In those 8 years, Iran was either under international sanctions or United States sanctions for a total of 5 years, losing hundreds of billions of dollars in oil and other revenues. The CBI during this time had to print money to pay the government’s bills.

President Ebrahim Raisi pledged upon assuming office last year that his government would not overburden banks by borrowing. However, it later issued bonds that are mostly sold to government-owned banks, which must turn to the central bank for money. In a vicious circle of borrowing from itself, the government simply prints more money – a practice that is not unique to the current administration.

Ghalibaf warned that the country cannot produce more oil – let alone export – and the current budget is already based on exporting 1.4 million barrels per day. The presidential administration wants even more money and that would demand daily crude production of 4 million barrels, which is an impossibility, he said.

Iran has failed to sufficiently invest money and technology in its oil and gas infrastructure in the past decades. Oil minister Javad Owji said last November that the country needs $160 billion to upgrade its oil and gas production.

But some economists in Iran ask why the financial situation has not improved despite higher oil sales in the past one year. Reports indicate that Iran has been exporting much higher volumes of crude to China, totaling more than $20 billion in 2021.

One explanation can be that China is not fully paying cash for its purchases. Another possibility is that Iran is replenishing its currency reserves depleted during sanctions instead of spending the money. A third possibility is that the additional sales have already financed close to $50 billion in imports in the past one year, without the government being forced to touch the remainder of its currency reserves.

The lifting of US sanctions in case of a nuclear agreement will not drastically change this picture, except raising oil revenues closer to $40 billion a year, which would ease the pain but not finance an economic reconstruction.