Compensate for the “operating balance deficit” of the budget without creating money

According to reports EconomyOnline According to IRNA, the issue of the budget deficit of 1400 is one of the main concerns of the government in organizing the economic affairs of the country, which has been facing major challenges for more than two years under the double influence of the Corona sanctions.

The most important issue in the budget deficit is its compensation through non-inflationary means; The path that the current government has taken to compensate for the budget deficit.

Recently, Massoud Mirkazemi, the head of the country’s program and budget organization, said in a closed session of the Islamic Consultative Assembly: “The 13th government inherits a lot of debts to the Central Bank, banks, social security and the National Development Fund, which is the result of a wrong budgeting system.” And this process should not continue. We prioritize debt management and spending. For the first time last month, government payments were made without creating money.

On Monday night, Ayatollah Seyyed Ibrahim Reisi said on a live TV program about the issue of borrowing from the Central Bank: “We must compensate for the budget deficit because borrowing is inflationary.” In September, the government started its activities and friends followed up and tried to make payments without borrowing from the central bank, which was done. In October, this will be done without borrowing from the central bank and the government will be paid salaries and expenses.

When it comes to projected government expenditures in the budget, the issue of operational balance arises. The fact is that this year’s budget has a negative operating balance, and the 13th government, instead of printing money to compensate for the budget imbalance, has tried to make up for it in other ways.

What is the operating balance in the 1400 budget?

In its simplest terms, “operating budget balance” means non-oil revenues minus current expenditures; That is, outside of oil sales and oil revenues, are government revenues and expenditures consistent or not? If the current expenditures of the government are more than its non-oil or stable revenues (taxes, customs revenues, etc.), the operating balance will be negative, and if it is lower, the operating balance will be positive.

The table below details this. The government has resources including various types of revenues (taxes, customs, etc.), the transfer of capital assets and the transfer of financial assets.

According to statistics related to revenues and expenditures, the total government revenues this year are estimated at 4548 thousand billion rials. In terms of expenditures, the government is supposed to spend 9189 thousand billion rials this year. The most important government expenditures in this area are the payment of salaries and wages to government employees and employees, the payment of subsidies and assistance to pension funds, and in general the contribution to the improvement of social welfare.

When we put revenues and expenditures together, it is clear that this year’s operating balance is negative 4641 thousand billion rials. This number means that the balance of payments deficit must be met from unstable revenues or oil revenues. Simply put, when government revenues do not meet current expenditures, it must make up for this imbalance through oil revenues, the sale of assets, or bonds.

The budget deficit includes the operating balance deficit. This means that the government may not be able to finance development projects and repay its obligations under the securities sold in addition to current expenditures.

However, as is clear from the budget figures, the main budget deficit is related to these current expenditures. Now, if oil revenues fall sharply due to sanctions and the sale of stocks and bonds is restricted, money printing can be one way to compensate for the budget deficit and operating deficit. This is called monetizing the budget deficit, which means increasing liquidity and rampant inflation.

The opposite is also true. If the government can compensate for the operating deficit without printing money, it means preventing the creation of money and further growth of the inflation rate.

the budget

What is the amount of liquidity?

According to the latest report of the Central Bank, the volume of liquidity at the end of August 1400 reached 3,921,000 billion tomans, which has increased by 39.1% compared to August 1399. Last year, in August, the amount of liquidity was about 2,819,000 billion tomans. This amount of liquidity and this amount of growth leaves no room for more money to make up for the budget deficit. Preventing the printing of money in September and October is positive news that is expected to continue in the coming months.


Complementary measures to control liquidity and inflation

Refraining from printing money is only one of the positive measures to control liquidity and inflation. The government must also take fundamental steps to reform and monitor the country’s banking system. According to economists, controlling the growth of liquidity and reducing its volume requires three basic solutions; First, the central bank can impose a number of restrictions on the growth of banks’ balance sheets. The second is strict supervision of banks to prevent speculators from engaging in speculative activities and other related entities. Instead of providing the capital needed by businesses and helping production, banks enter various markets, such as currency, coins, and housing, for reasons of debt repayment or interest paid by their depositors. This causes significant fluctuations and significant turmoil in these markets.

Controlling the granting of large facilities by the supervising authority is also the third solution. In some cases, banks provide large facilities to certain individuals and entities that do not invest in production and do not create employment.

In general, controlling liquidity and directing it in the right direction depends on government policy in the field of banking. It can be said that in this case, everything starts from the banks. But if the banks do not do their job properly, the flow of liquidity to the firms will be disrupted.

That is why the 13th government has targeted the tip of the liquidity and production policy arrow to the banks. “Seyed Ehsan Khandouzi”, Minister of Economic Affairs and Finance, in his program of the 31st Islamic Banking Conference entitled “Islamic Banking with a Look at the Statement of the Second Revolutionary Step”, spoke about the country’s banking system and the important issue of directing liquidity to production. Today, about 97% of money and liquidity are created by banks. So, the question that arises is whether this liquidity is directed to the production sector and entrepreneurs through the credits provided by the banks or enters the non-productive sector? Do banks use their money-making power to build or to destroy the country’s economy?

Thus, on the one hand, the government has refused to print money to compensate for the budget deficit, and on the other hand, it has put the reform and supervision of the banking system on the agenda. It seems that the government’s approach to liquidity management is on the right track, and the continuation and implementation of this approach can promise to control the flow of liquidity and reduce inflation according to the announced plans.

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