According to Khabar Online, liquidity growth has always been one of the most important indicators of economic policymakers’ attention; However, an increase in the amount of money alone cannot be a sign of an increase in the financial capacity of the economy. The simultaneous analysis of liquidity and exchange rate developments between 1396 and 1405 shows that in a situation where the amount of liquidity has increased more than 14 times, the jump in the dollar rate has caused the dollar value of this monetary variable to decrease drastically. On the one hand, this incident presents an image of the fall in the value of the national currency, and on the other hand, it highlights the need to pay attention to the effects of the devaluation of the dollar value of the financial resources of the economy on the ability to invest, produce and meet the foreign exchange needs of companies.
The liquidity volume of Iran’s economy has increased more than 14 times over the past 9 years, but at the same time as the dollar rate jumped 69 times, its dollar value has decreased from 358.3 billion dollars to about 73.4 billion dollars. An incident that indicates a strong weakening of the value of the national currency and a narrowing of the financial capacity of the economy.
Increasing liquidity has always been one of the most important variables of economic policymakers’ attention, but the simultaneous examination of the amount of liquidity and the exchange rate shows that the nominal growth of money does not necessarily mean an increase in the country’s economic capacity. Between August 2016 and Mehr 1405, liquidity has increased more than 14 times, but the increase in the dollar rate has caused its dollar value to reach about 20.5% of the figure of 9 years ago.
What is the dollar strength of liquidity?
To check these developments, an index called “dollar strength of liquidity” can be used. This index is obtained by dividing the total volume of liquidity by the dollar rate in the free market and shows the value of the country’s liquidity if converted to dollars at the free market rate.
Of course, this calculation does not mean the possibility of converting all the liquidity of the country into dollars or directly measuring the real purchasing power of the economy, but it is a measure to compare the changes in the nominal amount of liquidity with the changes in the exchange rate in a certain period of time.
Liquidity consists of the sum of money and pseudo-money and includes demand deposits, bank notes and negotiable instruments, and long-term bank deposits. The importance of examining the dollar value of this variable in an economy like Iran is because many manufacturing companies need foreign exchange resources to supply raw materials, machinery and parts.
Falling dollar value of cash from 358 to 73 billion dollars
A review of monetary and foreign exchange statistics shows that in August 2016, at the same time as the second government of Hassan Rouhani, the volume of liquidity in Iran’s economy was about 1,366 hemats. At that time, the dollar rate in the open market was around 3,812 tomans, and the dollar value of the country’s liquidity reached about 358.3 billion dollars.
But in October 1405, according to Central Bank statistics, the volume of liquidity has increased to 19,316 hemats. In this way, liquidity has increased by 14.1 times during this period.
However, the calculation of the dollar value of liquidity with the dollar of about 263 thousand tomans in October 1405 shows that this index has reached about 73.4 billion dollars. In other words, the dollar value of the country’s liquidity decreased by 79.5% during this period and reached less than one-fifth of the figure of 2016.
dollar 69 equaled; Liquidity lagged behind
The main factor of this divergence has been the sharp increase in the exchange rate and the devaluation of the national currency. The dollar, which was worth about 3,812 tomans in August 1396, reached about 263,000 tomans in October 1405; That is, it increased nearly 69 times in about 9 years and two months.
The intensification of sanctions after the withdrawal of the United States from the JCPOA in 2017, limited access to foreign exchange sources, difficulty in trade exchanges, structural deficits and continued high inflation were among the factors that put pressure on the value of the national currency in the past years.
In such a situation, the growth of liquidity could not keep up with the increase in the exchange rate, and this issue led to a sharp decrease in the dollar value of liquidity.
What is the consequence of the decrease in the dollar value of liquidity for production?
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 households; However, this index can provide a picture of the weakening of the economy’s nominal financial resources against foreign exchange costs.
For example, let’s consider a company that needs to import machinery, parts and raw materials to continue its activity. With the increase in the exchange rate, the cost of providing these inputs in national currency increases. If the company’s financial resources and ability to provide credit do not grow in proportion to this increase, the possibility of purchasing equipment and raw materials will be more limited.
The result of such a situation can be a decrease in production, postponement of investment and even stop part of the activities of companies. At the macro level, the decrease in investment, making it more difficult to modernize industries, and increasing the cost of production can aggravate the recession.
In fact, the currency jump does not only increase the price of the dollar, but also changes the ratio between the financial resources available in the economy and the cost of access to the goods and inputs required for production.
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