Iran's government allocated approximately IRR700,000bn in working capital distributed amongst banks to support agricultural and industrial sectors following the removal of preferential currency rates, recently reinstalled CBI governor Abdolnaser Hemmati said on January 19, Tasnim News Agency reported.

Hemmati said the new mechanism for financing production companies in agricultural and industrial sectors was designed to avoid disrupting production whilst being implemented without inflationary effects.

The government activated operational task forces based on Article 138 of the constitution with participation from economic ministers to manage consequences of removing preferential currency rates, he said. Decisions made by these groups carry the weight of cabinet resolutions after presidential approval.

The minister said Agricultural Bank's capital increased by IRR50,000bn using budget law provisions, whilst IRR70,000bn in capital increases were allocated for Industry and Mine Bank. An additional IRR20,000bn from a different source was planned for Agricultural Bank and will be realised soon.

Capital increases for several other banks were also planned under the current year's budget law, Hemmati said. The working capital was distributed amongst banks to be made available to agricultural and industrial sector participants introduced by the Agriculture Ministry and Industry, Mine and Trade Ministry.

The minister addressed concerns about inflationary effects, stating the Central Bank simultaneously implemented contractionary monetary policy. If liquidity is created on one side, the same liquidity is collected on the other side through a process known as sterilisation in economic literature, ensuring the plan is implemented without inflationary impact.

Liquidity injection to finance enterprises' working capital could be interpreted as increasing the monetary base, though simultaneous design of contractionary monetary policy by the Central Bank shows this approach is not limited to money creation but manages side effects through control mechanisms, Tasnim reported.

The policy aims to ensure enterprises needing liquidity for importing essential goods and continuing production processes do not face problems and can continue activities without interruption using working capital allocated at Agricultural Bank, Industry and Mine Bank and other banks.

Hemmati said the government also used various chain financing methods. Special currency GAM bonds were approved allowing importers of essential goods to secure required foreign exchange. Importers pay only a limited amount initially, with final settlement occurring after purchase, sale and return of resources.

Tools including factoring, electronic promissory notes and other modern financing methods were also designed and implemented with Central Bank cooperation, the minister said.