Iran’s liquidity increased 14 times in 9 years, but its dollar strength fell by 80% / the jump in the exchange rate swallowed the value of liquidity

Amir Abbas Azarmvand: The growth of liquidity has always been one of the most important variables in the attention of economic policymakers in Iran; However, the simultaneous analysis of liquidity and exchange rate developments shows that simply increasing the amount of money in the economy cannot be a sign of increasing the financial and economic capacity of the country. Between August 1396 and Mehr 1405, while the volume of liquidity has increased more than 14 times, the 69-fold jump in the dollar rate has caused the dollar value of the total liquidity of the Iranian economy to reach less than 21% of the figure of 9 years ago; An incident that indicates the deep weakening of the value of the national currency and the narrowing of the financial capacity of the economy.

The increase in the price of the currency and the decrease in the value of the national currency are among the events whose consequences cannot be limited to the increase in the price of imported goods or the increase in the living costs of households. These developments gradually affect the financial capacity of the economy, the ability of production enterprises and even the possibility of meeting the capital and intermediary needs of industries.

The famous 20th century economist John Maynard Keynes, in a quote attributed to him, warned of the consequences of currency devaluation: “There is no subtler or surer means of overturning the existing foundations of society than devaluing the currency. This process uses all the hidden forces of economic law to destroy, and it does it in a way that not one person in a million can detect.”

The importance of this warning becomes more clear when we consider the effects of the devaluation of the national currency beyond the general increase in prices. An increase in the exchange rate, especially in an economy like Iran, where a significant part of its production needs depends on the import of raw materials, machinery, parts and intermediate goods, can lead to an increase in the cost of production and aggravation of inflation. But this is not the only consequence of currency fluctuations. An increase in the dollar rate simultaneously causes a decrease in the dollar value of liquidity in the economy; A problem that can limit the financial capacity of companies and the ability to meet the country’s economic needs.

What is the dollar strength of liquidity?

To better understand this issue, an index called “dollar strength of liquidity” can be used. This index is obtained by dividing the total liquidity in the economy by the dollar rate in the free market and shows the value of the country’s liquidity if converted into currency at the free market rate.

Of course, it should be noted that this calculation does not mean the possibility of converting all the country’s liquidity into dollars or directly measuring the real purchasing power of the economy; Rather, it is a measure to compare the changes in the nominal value of liquidity in the national currency with the changes in the exchange rate in a certain period of time.

According to this calculation, as much as the dollar rate increases, the dollar value of liquidity decreases; Unless the growth of liquidity is enough to compensate for the increase in the exchange rate. For this reason, it may happen that the volume of liquidity increases nominally, but its dollar value continues to decrease.

Liquidity in its economic definition consists of the sum of money and pseudo-money. Money includes banknotes and securities in people’s hands and demand deposits. Pseudo-money also mainly includes non-demand and long-term bank deposits. The sum of these two is considered one of the most important indicators for measuring the volume of money and liquid assets in the economy.

The importance of examining the dollar value of this variable is because in economies dependent on imports, the exchange rate plays an important role in determining the cost of access to resources and goods needed for production. Therefore, the decrease in the dollar value of liquidity can indicate the narrowing of the nominal financial capacity of the economy compared to its foreign exchange costs.

fall 80 Percent strength of dollar liquidity in 9 year

A review of monetary and foreign exchange statistics shows that over the past 9 years, Iran’s economy has faced a sharp decline in its dollar value, despite experiencing a significant growth in liquidity.

In August 2016, when Hassan Rouhani began his second term as president, the total liquidity of Iran’s economy was about 1,366,000 billion tomans, equivalent to 1,366 hemats. At that time, the dollar rate in the open market was around 3,812 tomans. Based on this, the total dollar value of the country’s liquidity was estimated at 358.3 billion dollars.

This situation has become significantly different in October 1405. According to Central Bank statistics, the amount of liquidity in Iran’s economy has reached 19,316 hemats this month. In this way, the volume of liquidity has increased by 14.1 times between August 1396 and Mehr 1405.

Despite this significant increase, the dollar value of liquidity has not only increased, but has also decreased drastically. Considering the rate of about 263 thousand tomans to the dollar in October 1405, the dollar value of the total liquidity of the Iranian economy reaches about 73.4 billion dollars.

The comparison of these two numbers shows that the dollar power of Iran’s economy has decreased by 4.88 times between these two periods of time. In other words, the dollar value of the country’s liquidity in October 1405 reached about 20.5% of the figure of August 1396. This happened in a situation where the amount of cash in national currency has increased more than 14 times.

dollar 69 equaled; Liquidity lagged behind

The main reason for this divergence has been the sharp decline in the value of the national currency against the dollar. In August 2016, each US dollar was worth about 3,812 Tomans; But in October 1405, its price reached about 263 thousand tomans. In this way, the price of the dollar has increased nearly 69 times in the space of about 9 years and two months.

This trend has been formed in the past years under the influence of a series of economic and political factors. In 1396, with the beginning of the second term of Rouhani’s government, the exchange rate was still in the range of several thousand tomans, but as the year continued and inflationary expectations intensified, the currency price increased. In 2017, the unilateral withdrawal of the US government from the JCPOA and the return of economic sanctions created new conditions in the currency market and the pressure on the value of the national currency increased.

In the following years, the continuation of sanctions, limited access to foreign exchange resources, difficulty in commercial transactions, structural deficits of the economy and the continuation of high inflation provided the basis for further weakening of the rial. In such a situation, the growth of liquidity could not keep up with the increase in the exchange rate, and as a result, the dollar value of the country’s total liquidity decreased drastically.

What effect does the decrease in the dollar value of liquidity have on the economy?

The decrease in the dollar value of liquidity cannot be equated to a real shrinking of the economy or a direct decrease in the purchasing power of all households; However, this index can be one of the important signs of weakening the nominal financial capacity of the economy against foreign exchange costs.

For example, consider a company that needs to import machinery, parts or raw materials to continue its activity. When the exchange rate increases, the cost of providing these inputs to the national currency increases greatly. If the financial resources of the company and its ability to provide credit do not grow in proportion to this increase, the possibility of purchasing raw materials and required equipment will be more limited. As a result, the company may be forced to reduce production, postpone investment or even stop part of its activities.

This issue also has important consequences at the macro level. Decrease in investment, more difficult to modernize industrial equipment, increase in production cost and limiting the ability of companies to compete can lead to the worsening of the recession. On the other hand, the increase in the cost of importing production inputs puts additional pressure on the finished price of goods, and in this way, the currency jump from another direction also fuels the increase in inflation.

In fact, the increase in the exchange rate does not only increase the price of the dollar; It also changes the ratio between the financial resources available in the economy and the cost of access to the required resources and goods.

In such a situation, controlling the currency market and preventing the continuation of the devaluation of the national currency becomes particularly important. Of course, it is not possible to manage the exchange rate by simply intervening in the market or injecting foreign exchange resources. Achieving this goal requires a set of coordinated policies in the monetary, commercial and foreign exchange fields.

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