Iran’s Government Heavily Borrowing From Banks Amid Crisis

Iran’s government has been aggressively borrowing from quasi-public banks to fill its budgetary gap and keep its unprofitable companies afloat, local media report.

According to a report in Aftab News website, affiliated with reformists, the government borrowed around $12 billion from four major quasi-private banks in three months ending June 21. To ensure availability of funds, it issued directives to these banks to reduce lending to the private sector, causing the loss of 500,000 jobs amid an already serious economic crisis.

The government borrowed more than 4,000 trillion rials, or more than $8 billion just from Bank Mellat, both for its own operating expenses and for money-losing public and semi-public companies run by political appointees and well-connected insiders.

Fully government owned banks issue no figures, and it is not clear how much they have lent to the government, but Aftab News warned that government borrowing is much higher at these banks that are run by appointed officials. The semi-government banks, such as Mellat, are traded on Tehran stock exchange and issue financial reports.

The issue is that these banks faced with balance sheet problems when they lend excessively to the government, are forced to borrow from the Central Bank of Iran (CBI), which in turn has to print more money, fueling inflation. Official numbers indicate that the annual inflation is hovering around 50 percent, but some observers recently claimed that in fact inflation has reached 70 percent.

A market analyst said in April that “The growth rate of the monetary base has reached 38 percent and liquidity has reached 34 percent. This unprecedented gap means that the government is printing more money and making up for the budget deficit by heavily borrowing from banks and forcing them to borrow from the central bank.”

As a result of increasing money supply, the rial has fallen 12-fold in the past 5 years and has halved in value in the past one year. It is now trading around 500,000 to one US dollar.

The former governor of Iran's central bank Abdolnasser Hemmati, who is among the outspoken critics of the current administration, also said in March that “in order to control inflation and rial’s exchange rate, the government should take serious measures to reverse growing liquidity.”

It is not entirely clear why the government is so much short of money when its oil exports have substantially increased since 2021, reaching a reported volume of 1.5 million barrels per day.

The only reasonable explanation is that it offers deep discounts to those who are willing to risk US third-party sanctions, which are mainly Chinese refineries. According to some estimates, Iran is able to offload its crude oil for just $40 a barrel, or half that of current global prices. Moreover, it is not being paid in hard currency, and part of the sales are based on barter for needed imports.

Economists expect the inflation rate to accelerate if no major economic improvement takes place. Currently, Iran’s only hope is for the United States to lift its sanctions or agree for third countries to release around $20 billion of Tehran’s frozen funds. But some say even in that case, the reprieve will be a temporary one, as the current government has proven to haveextremely weak management abilities.