By Mark DeWeaver.
This year the Ministry of Finance (MoF) is set to sell IQD 11 trillion in new debt to the state sector banks, thereby partially filling the hole in the central government budget left by the recent collapse in oil prices. The new issuance should bring total treasury bills outstanding to IQD 18 trillion, a 156% increase over the end of last year and more than double the previous peak level of November, 2010.
T-bill issues of this magnitude could potentially provide a sizable boost to money supply growth. Consider what would happen if the state banks didn’t keep any of the new bills on their balance sheets but instead sold all of them to the CBI (Central Bank of Iraq). The central bank would pay the banks by crediting their reserve accounts, thereby monetizing the increase in government debt by “printing” new money. (Such operations are allowed under Article 26, Section 2 of the CBI Law.)
The resulting IQD 11 trillion increase in base money (commercial bank reserves + cash in circulation) could increase Iraq’s M2 money supply by as much as IQD 15 trillion (assuming the current M2 multiplier of 1.37 times). (M2 includes base money and commercial bank deposits.) That would be a 17% jump, a dramatic acceleration from December’s year-on-year M2 growth of just 3.3% to growth rates last seen in 2013. (See Chart.)
Engineering a monetary stimulus of this magnitude might be a good policy for the government to pursue. With GDP growth at a multi-year low (see my last post) and year-on-year inflation dropping to -0.41% in January, why shouldn’t the CBI attempt its own version of “quantitative easing?”
Yet it is far from clear that the government has any such plan.
This year’s T-bill sales will not be unprecedented. From April, 2009 – April 2010, total T-bills outstanding rose by IQD 7.2 trillion—the same 17% of initial base money that IQD 11 trillion would represent today. And none of those earlier T-bills were sold to the CBI. In fact, the central bank hasn’t had any T-bills on its balance sheet since March, 2006.
If this precedent is repeated, this year's new issuance will have no impact on the money supply at all.