A money market analyst has warned about the inflationary effects of the mammoth government debt to the banking system, saying it was creating a dangerous situation, resulting in an explosion of monetary base and runaway inflation.

Inflation, now hovering at 15%, reached 40% in October 2013.

Bahaoddin Hosseini Hashemi, the former CEO of Bank Saderat, told Eghtesad News website that the government’s debt to banks is hastening the ruin of banks since they will have to resort to increasing their lending rates to compensate for their losses, adding that borrowers would have to bear the brunt of the government’s debt to commercial banks.

Government’s debt to the banking sector grew by 7% to 920 trillion rials ($28.2 billion) in the first half of last fiscal year (March 21-September 22), according to central bank data. Of the sum, 20 trillion rials were owed by state-owned companies and the rest by the government itself.

“A significant portion of the banks’ assets are now out of circulation and this is incurring huge losses for the banks,” Hashemi said. “The government has not been able to put right the capital system of banks, and this has diminished the lending power of banks and raised the cost of money.”

The former CEO opined that economic optimism correlates with the banking system, saying an economy whose banks are failing would ultimately falter.

“Banks support both manufacturers and consumers by lending to them,” he said. “Inflation has soared but wages have not kept pace with it. That means there is not enough income to meet consumers’ demand.”

The former banker suggested deposit rates to be tempered and banks to be allowed to withdraw more from the central bank so they can restructure themselves.
“The banking system should operate in a way to cover the cycle of manufacturing and consumption to generate wealth and income,” he said.

By Financial Tribune