The governor of the Central Bank of Iran says issuing bonds is appropriate for plugging the budget deficits.
In a note on his Instagram account Friday, Abdolnasser Hemmati said issuing bonds would also help the government avoid printing money to compensate its budget deficits.
“Issuing bonds will not only assist the government meet its [budgetary] needs, but also help expand the debt market, fix balance sheets of banks and offer control inflation,” he wrote.
As per the budget law for the current fiscal year, the government expects to make 1,090 trillion rials (6.8 billion) from issuing different types of bonds. This amount is up 70% compared to the 640 trillion rials that was envisaged in the last budget.
The government is struggling with chronic budget deficits due to United States sanctions that have hurt Iran’s foreign trade and hit various sectors of the economy, particularly oil exports, banking and shipping.
Collapse in international crude oil prices have further undermined the already strained oil receipts and created a spending crisis for the government struggling to fight the coronavirus.
Brent crude is trading around $26 per barrel compared to $50 per barrel projected in the March 2020-21 budget.
According to IRNA, Iran’s oil price is tagged lower, below $15 per barrel, causing lawmakers to reconsider government projections from oil revenues in the new budget.
Hemmati said the CBI is ready for extensive use of open market operations to help the government cope with its budgetary problems.
OMO became operational in January as part of CBI policy to reduce banks’ dependence on the regulator and tame inflation. It enables lenders to better manage their liquidity needs and offer surplus liquidity on the interbank market.
The monetary policy offers financial instruments through which central banks can buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates. By the same token, selling government bonds reduces the base money and raises interbank rates.
Within this framework, banks in need of liquidity offer bonds to central bank or other banks.
However, except for one initial trade, lenders didn’t put up their bonds on offer, which is construed as their lack of need for liquidity.
Regarding the latest round of open market operation Wednesday, the CBI said “there was no sale order by banks on the OMO trade platform… This shows liquidity is sufficient in the interbank market”.
