Expert: Iran Government's way of paying off debts Central Bank is more like stage magic

Photo: Expert: Iran Government's way of paying off debts Central Bank is more like stage magic / Iran

Azerbaijan, Baku, July.22/ Trend /

Pr.Kamran Dadkhah's exclusive article for Trend. Iranian origin economist Dadkhah is associate professor in the department of economics at Northeastern University, Boston.

Finding reliable data on the Iranian economy has become increasingly more difficult. The data on government debt to Bank Markazi (the central bank) is reported in the annual balance sheet and economic report of the bank. For the past three years the bank hasn't published its balance sheet; the last issue published was for the year 2009. Based on other reports of the bank we know that by the end of 2010, the government (including companies and organizations owned by the government) debt to the central bank was 219 trillion rials or at the official exchange rate of the time, $17.9 billion.

On June 9 of this year Mr. Shamseddin Hosseini, Iran's finance minister, declared that the government and government companies and organizations owed the central bank the equivalent of 350 trillion rials. Then Mr. Ahmad Tavakoly, a member of the Iranian Majlis (parliament) declared that the government has reevaluated its dollar deposits in the central bank using the new official exchange rate. Since the difference between the new rate and old rate is 12740 rials and since the government had deposited $58 billion, this would add 740 trillion rials to the government deposits in the bank. If we believe the numbers of the finance minister and Mr. Tavakoly, then the government has wiped out its debt to the central bank and has even 390 trillion rials extra to bequeath to the next government.

But this is no more than legerdemain (an accounting trick). The government could have set the official rate at 30,000 rials per dollar and in that case the difference would have been 1029 trillion rials. But an economy cannot be managed with accounting tricks.

There is no danger of the central bank declaring bankruptcy. Let us recall that the central bank as the representative of the government can print money. It will never be short of cash, but of course it can create a runaway inflation and ruin the economy.

It is possible for Mr. Ahmadinejad to declare that he is leaving presidency with no government debt to Bank Markazi. But, as mentioned before, this is just an accounting trick. This trick in itself would not create inflation but will set the stage for an unprecedented inflation.

Let us recall that the net government debt to the central bank, that is, government debt minus government deposits with the bank, is a component of monetary base (or high powered money). If the next government starts spending the extra 390 trillion rials it will add close to 2000 trillion rials to liquidity in the economy, because the money multiplier in the Iranian economy is estimated to be around 5.

In addition, because the government and government companies do not owe anything to the central bank, they may start borrowing from Bank Markazi, thus fueling an astronomical inflation.

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