The dollar strength of Iran’s liquidity has fallen to a historical low of 73 billion dollars / Iran’s liquidity has been depleted in two decades

Iran’s economy is facing an important contradiction; The volume of Rial liquidity continues to increase and set new records, but the dollar value of this liquidity has decreased drastically. Analysis of the trend of dollar liquidity shows that this index, which reached about 377 billion dollars in August 2016, fell to about 73 billion dollars in October 1405. This decrease occurred in a situation where the exchange rate increased at a faster rate than the growth of the Riyal money volume.

Vahid Shaghaghi Shahri, an economic expert, in an interview with Khabar Online, while examining the reasons for this incident, explains about its consequences for the currency market, production, financing and economic policy.

Falling dollar power of liquidity to the lowest level in the last two decades

Referring to the latest estimates of the liquidity situation in Iran’s economy, Shaghaghi says: the dollar strength of the country’s liquidity has reached about 73 billion dollars in October 1405. This figure was calculated taking into account the dollar rate of 265 thousand tomans and the volume of liquidity of 19 thousand and 316 hemtis and shows that the dollar value of Iran’s liquidity has reached one of its lowest historical levels in the last two decades.

Referring to the significant gap between this figure and the historical average of the index, he explains: the average dollar strength of liquidity between 1390 and 1404 was about 211 billion dollars, while this index reached a historical peak of about 377 billion dollars in August 2016. Therefore, the figure of 73 billion dollars in October 1405 shows a significant decrease in the dollar power of liquidity in the Iranian economy.

Shaghaghi Shahri believes that for a better understanding of this development, the multi-year trend of the indicator should be examined. The dollar power of liquidity, which was about 377 billion dollars in 2016, decreased to 150 billion dollars in 2019. After fluctuations in the following years, this index reached 147 billion dollars in 1403 and 140 billion dollars in 1404, and now it has fallen to 73 billion dollars in October 1405.

Why has the dollar’s strength decreased despite the increase in liquidity?

Explaining the concept of dollar power of liquidity, this economic expert says: This index is obtained by dividing the amount of riyals of liquidity by the dollar rate and is a measure for measuring the dollar value of the money in the economy. For this reason, it can be used to examine changes in the value of liquidity compared to tradable goods and services in foreign markets.

He emphasizes that the decrease in the dollar power of liquidity does not mean a decrease in the amount of money in the economy, but it shows that the dollar rate has increased at a faster rate than the amount of rial liquidity.

Shaghaghi Shahri, pointing out that the volume of Rial liquidity is still increasing, explains: the volume of liquidity in March 1404 reached more than 15 thousand 581 Hamats and recorded a growth of 53%. However, the dollar value of this liquidity has decreased due to the faster increase in the exchange rate.

According to him, this situation shows that Iran’s economy is facing a continuous growth of the nominal amount of money on the one hand, and on the other hand, the power of this money to buy foreign goods and services has been greatly weakened. In other words, an increase in liquidity does not necessarily mean an increase in the real financial strength of the economy.

What are the consequences of the fall of the dollar’s liquidity for the economy?

Shaghaghi Shahri, in the continuation of the conversation, points out the importance of this index for economic policy makers and says: The dollar strength of liquidity helps us to get an image of the financial capacity of the economy to finance imports, implement projects related to foreign goods and fulfill foreign exchange obligations.

He believes that when this index decreases, the dollar capacity of the economy to finance the budget, settle foreign exchange obligations and import-based investments will also become more limited. From this point of view, the decrease in the dollar’s liquidity should be seen as a sign of the deepening of the gap between the nominal value of money and the real power of the economy.

At the same time, this economic expert points to the roots of the continued growth of liquidity and says: budget deficit and bank overdrafts are still one of the main factors of increasing the volume of liquidity. Therefore, in a situation where the exchange rate grows faster, we simultaneously see an increase in the nominal volume of money and a decrease in its dollar value; A situation that can be seen as a sign of financial and currency breakdown in the country’s economy.

A decrease in the liquidity of the dollar can put pressure on the currency market

In describing the first consequence of this situation for the economic markets, he explains: the drastic departure of the dollar’s liquidity from its historical average can affect the expectations of economic operators. In such a situation, the impression may be formed in the market that the dollar rate is at a low level compared to the volume of Rial liquidity, and this impression can lead to an increase in speculative demand and renewed pressure on the currency market.

Shaghaghi Shahri further points out the consequences of this trend for the production sector and says: the decrease in the dollar’s liquidity means the limited capacity to provide the working capital required for the import of raw materials and intermediate goods. This issue puts additional pressure on production companies in the situation where the banking network is facing a credit crunch.

Referring to the interbank interest rate in the range of 34% and point-to-point inflation of 89% in October 1405, he believes that the combination of these variables can increase the cost of financing and the cost of production and make the conditions of business more difficult.

Capitals move towards currency, gold and housing

This economist considers another consequence of the decrease in the dollar’s liquidity to be the change in the behavior of investors and the transfer of assets.

According to Shaghaghi Shahri, the continued decline in the dollar value of liquidity can lead investors to assets such as currency, gold, and housing; Assets that are usually considered as value preservation tools in monetary and currency instability.

He believes that this transfer of capital can lead to the aggravation of price bubbles in the domestic markets. Although the dollar value of some Riyal assets may decrease in the short term, the continuation of monetary instability can increase the demand for assets that are resistant to currency depreciation.

Stabilizing the exchange rate without curbing money creation is not sustainable

In another part of this conversation, Shaghaghi Shahri addresses the policy requirements to stop the downward trend of the dollar’s liquidity power and emphasizes: any effort to curb inflation or stabilize the exchange rate, without controlling the roots of money creation and correcting economic expectations, cannot lead to a sustainable result.

He considers the budget deficit and banking disequilibrium to be the most important factors for the continued growth of liquidity and believes that until these two issues are resolved, the policy of stabilizing the exchange rate alone cannot prevent the deepening of the gap between the nominal and real value of money.

According to this economic expert, if the money creation engine is still active, the stabilization of the dollar rate can only hide this gap for a while and eventually provide the ground for more risky price corrections.

In conclusion, he emphasizes that in order to stop the fall of the dollar power of liquidity, the policymaker must first of all curb the uncontrolled growth of liquidity caused by the budget deficit and bank overdrafts, and at the same time, by stabilizing economic expectations, prevent the formation of new jumps in the currency market.

From Shaghaghi Shahri’s point of view, the fall of the dollar power of liquidity to 73 billion dollars is not merely a statistical indicator, but a warning about the weakening of the financial foundations of Iran’s economy and the deepening of the gap between the nominal and real economy. A situation that, if continued, can have wider consequences for the production, investment and economic stability of the country.

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