The growth in liquidity in the current year has been 37 percent according to the Central Bank, despite the stated goal of 22 percent.

Every year the government announces that it plans to sell participation bonds to the general public, but before the stated date arrives, it announces that bonds have been sold.
According to Hamshahri Online, Central Bank of Iran (CBI) is authorized to sell bonds worth 20 trillion rials by next March.
Seyyed Ali Asghar Mir-Mohammad Sadeqi, deputy CBI governor for credit affairs, predicted that the initiative will be welcomed by people.
“We recommend people invest their savings in bonds, which is the safest investment,“ he said, adding CBI has established online links with agent banks, tasked to sell them, to receive daily data on sales.
He said bonds will be sold with a 15.5-percent annual profit rate at this stage. “The profit will be paid every three months,“ he said, adding that the parliament has authorized issuance of 20 trillion rials of bonds this year, which amount could increase upon public demand and approval of parliament.
Last June, the cabinet authorized Ministry of Economy and Finance Affairs and CBI to issue bonds to accelerate implementation of development projects. The cabinet approved issuance of bonds at request of Management and Planning Organization (MPO).
Based on approval, the ministry will guarantee bonds on behalf of the government. CBI will be in charge of distribution. MPO will also provide required funds. State Audit Organization is tasked to supervise bond distribution.
Experts say bonds are distributed to control deteriorating liquidity growth and encourage people to invest in national development projects.

Pros
Monetary policy aims to manage money supply, inflation and interest to affect output and employment. Inflation is decrease in value of a specific currency over time and caused by dramatic increases in money supply. The interest rate is an important tool used to control inflation and economic growth in monetary economics.
The Central Bank is responsible for monitoring and controlling money supply, interest rates and banking.
Under the law of issuing bonds ratified in 1997, the government can only issue bonds to secure capital needed to implement development projects nationwide.
Article One of this law stipulates that for participation of general public in for-profit and non-profit development plans carried out by state or private institutes, part of the funds can be secured through issuing and selling bonds to them.
One of the major economic impacts of bonds is that they secure financial resources. This means, in the event of a budget deficit, the best method to secure funds for implementing development projects would be that government issue and sell bonds.
This is much better than the similar option of attracting foreign finance or printing banknotes.
Another positive impact is that they make liquidity costs transparent because the government is forced to pay profits. Moreover, they can reduce inflation rate and its adverse impacts. Head of Central Bank, Ebrahim Sheibani claims that every year bonds reduce inflation rate by 3 percent.
Sheibani says, every rial injected by Central Bank creates 5 rials instead, also known as super strong money.
“If we manage to collect money, one rial will amount to one rial only, not more. This means, normal money replacing super strong money.
Thus, issuing and selling bonds are more constructive and appropriate than printing banknotes by the Central Bank,“ he added.
Moreover, bonds can reduce the volume of tangible money in society to a great extent.

Money Supply
Money supply is the amount of money available within an economy for purchasing goods or services. Liquidity growth rate in developed nations stands around 5 to 7 percent, whereas in a developing nation like Iran, it is fivefold or 27 percent per annum.
For instance, liquidity was around 170,000 billion rials in year 2000, 500,000 billion rials in 2005 and 950,000 rials in 2006.
The growth in liquidity in the current year has been 37 percent according to the Central Bank despite the stated goal of 22 percent. Current growth in liquidity will have adverse impacts on national economy and the best the government could do is to issue and sell bonds to control the situation.

Link
The government argues that there is no relation whatsoever between liquidity growth and inflation rate in recent years. However, in a developing nation where people want more, money supply means more desire to spend which leads to less investment and savings. More spending means increased demand in market accompanied with inflationary effects. For instance, rise in general levels of prices.
Therefore, price rise, as measured against some baseline of purchasing power, along with development of unproductive service sectors will increase liquidity and the government will have to optimize financial tools to control the same.
Moreover, easing production will make money lose value through inflation. The biggest criticism of banknotes is that its stability is subject to government regulation rather than market forces.

Cons
If money collected by agent banks from bond sales is used to give long-term investment loans to producers, the results will be positive. However, if money is spent on the government’s current expenditures, there is cause for concern.
The more money government spends, the more growth in its size with long-term adverse impacts on the national economy.
Another drawback is high rate of profits for investment and their guarantee by Ministry of Economy on behalf of government.
Furthermore, being exempted from tax, high costs of issuing bonds, high lending rates and payment of lending charges every three months might in practice discourage entrepreneurs from getting involved in production activities and instead save money by opening a savings account.
Thus bonds distributed by private sector but under direct supervision of Central Bank are a good choice and also have better economic impacts for country, as public participation can speed up the process of economic development and growth.
A monetary crisis can cause significant economic impact, particularly if it leads to monetary failure and adoption of a less efficient barter economy. So the government should never sell stock market shares only to certain individuals or political groups and factions. There should always be some kind of equality when it comes to selling shares and bonds. Only then sustainable economic development and growth as well as fairer social justice can be ensured.

The hike in oil price played a key role in reducing inflation.

Examining Iran’s inflation trend, as a leading economic index during 1990-2006, provides economists the opportunity to compare the financial performance of the incumbent government with that of previous governments.
Official figures reveal that the average inflation rate during the presidency of Akbar Hashemi Rafsanjani (1989-1997) was 26.4 percent. It decreased to 15.7 percent during the presidency of Mohammad Khatami (1997-2005). The average rate further declined to 12 percent in 2005 when President Mahmoud Ahmadinejad took office.

Past Performance
Economic analysts have indicated that the Rafsanjani administration sought to implement financial and monetary expansionist policies during 1989-93 to move the nation’s economy towards unifying the foreign exchange rate and liberalizing imports.
Following such policies, which are reducing the value of national currency and moving towards a floating foreign exchange system, Iran experienced the highest inflation rate of 49.4 percent in 1995.
According to IRNA, the government in 1995 again announced that informal foreign exchange markets were illegal. In line with stabilizing prices, Rafsanjani once again tried to stabilize the foreign exchange rate by defining governmental and export rates. He also severely controlled liquidity by regulating bank credits and reducing facilities. Inflation declined yet again during 1996-97 and reached 17.3 percent in 1997.
Since then, an incremental reduction in oil prices world over hindered the growth of gross national product. In 1998, Iran’s oil revenues declined from $26 billion in 1996 to $16 billion in 1998, resulting in budget deficit and liquidity rise. This led to an increase in inflation rate which rose to 20 percent in 1999.
Oil prices improved in 2000. The price of one barrel of Iran’s crude oil increased from $16.78 in 1999 to $26.13 in 2000, registering a 56-percent hike in prices. This led to the country’s economic takeoff which played a key role in reducing inflation.
However, as a result of policies to unify the foreign exchange rates in 2002, inflation again rose from 11.4 percent to 15.6 percent in 2003.
When Ahmadinejad became president in 2005, the inflation rate declined to 12.1 percent due to price stabilization plan for controlling prices.
Government measures to control prices caused the inflation rate to decline to 11.5 percent in 2006.
The Central Bank of Iran’s reports reveal the index of consumer goods and services prices in urban areas to be 11.5 percent during October 2005-2006.

Solution
Economic officials say controlling the inflation rate should be the major concern of government and the most significant axis of economic plans.
They say regulating the inflation rate requires adoption of measures to identify fundamental inflationary factors such as liquidity growth.
Economists in President Ahmadinejad’s cabinet have devised solutions to control inflation in the short run. They recommend that he continue price control policies, supervise bank facilities, control liquidity, stabilize foreign exchange rate and cut the administrative costs of executive organizations.
Officials are advised to strengthen production-consumption link, focus on productivity, reorganize budget structure, increase tax revenues and activate capital markets.
Regularizing subsidies and government intervention in the housing market are two other important factors for controlling inflation in the long run.
Under the current circumstances, the government is determined to realize the concept of justice, which is the main principle of the Islamic Republic, while officials are aware that controlling inflation and removing economic problems require a great deal of time and effort.