In next year's proposed budget the government is allowed to securitize up to 200 trillion rials ($2 billion) of its debts to banks.
This is as per the provisions of Note 5 of budget bill and part of Central Bank of Iran’s open market policy and the initiative to offer Islamic bonds to be bought by the banking system and then be used as collateral by lenders to borrow from the central bank.
The bill stipulates that the initiative covers only the debts that are finalized by the end of the current fiscal that ends in March 2019.
According to the CBI website, at a meeting of the Supreme Council of Economic Coordination on October 3, permission was granted to the regulator to undertake open market operations according to which it could trade in Islamic bonds issued by the government as part of a plan to implement monetary policies.
Open market operations are a financial instrument through which central banks buy and sell securities in the open market to expand or reduce the supply of money. Security purchases inject money into the banking system and stimulate growth, while securities have the opposite effect as the economy contracts.
The 2019-20 budget bill says the CBI will launch open market operations and trade in Islamic bonds issued by government for clearing its debts to banks.
It emphasizes that the CBI is allowed to buy and sell Islamic bonds only in the open market and at rates decided therein.
The Ministry of Economic Affairs and Finance can use government assets to back Islamic financial bonds without undergoing the usual legal formalities.
In a recent report analyzing the pluses and minuses of the budget bill, the Majlis Research Center weighed in on its OMO measures.
The parliamentary think tank first faults the fact that the budget bill only "describes" the OMO as a possibility and does not oblige the government to actually “undertake" the measure.
Noting that the OMO is now an undeniable necessity, given the need for controlling interest rates, the MRC says some prerequisites should first be clear. Among the most important actions, MRC says, is the need to get rid of "bad banks" because these banks simply do not have enough liquidity to buy government bonds.
