In a directive to administrative bodies on Wednesday, the Plan and Budget Organization outlined procedures for implementing a multilateral bartering scheme involving the government, private companies and banks.
The scheme, mentioned in the 2019-20 national budget, allows the government to swap its debts to cooperatives and private firms with debts of the private sector to administrative bodies, banks and non-government credit institutions.
The initiative is in line with Note 5 of the budget law that permits the government to issue 20 trillion rials ($171 million) in treasury bills to settle its debt to cooperatives and private companies.
As per the directive, published on the official PBO website, the government, banks plus legal and natural entities can settle their debts via special treasury bills through one of the following ways:
- For settling debts of the first group, the PBO issues treasury bills, especially designed for this purpose, to barter the final government demand on its debtors with government arrears to its creditors.
(Creditors are mainly contractors who have worked on government’s development projects)
- Treasury bills of the second type will be issued to barter the debt of legal and natural entities to lenders and non-bank credit institutions with government debts to the two entities.
The move allows private companies, public entities and cooperatives that have demands on the government and also owe money to banks, to swap their debts, but only if the relevant bank is also indebted to the Central Bank of Iran.
MRC Backing
In this way debts of banks and credit institutions will be considered as the government’s financial commitment to the CBI. Debts in this category should belong to the end of fiscal year (March 2017-18).
In a January report, the Majlis Research Center supported this method of debt swap between government entities, saying that in this way banks’ debt to the CBI will be adjusted and rewritten as government debt to the CBI and help reduce the struggling lenders’ mountain of debt to the CBI.
Elaborating the merit of the scheme, the MRC said less government debt should contribute to growth, advance the business climate, boost investment, create jobs and improve the performance of banks long saddled with mismanagement, inefficiency, lack of openness and dubious lending practices.
The influential research arm of the Majlis said as the debt of banks and credit institutions would be government debt to the CBI, the monetary base would not expand.
In addition, the treasury bills issued for debt settlement do not incur new financial cost.
Monetary base is the sum of total currency in circulation and the amount held by banks and its expansion is an indication of rising liquidity.
The measure is said to help banks lessen the heavy burden of non-performing loans -- the main reason behind their acute credit crunch in recent years.
Finally, it would considerably reduce government commitment to the non-public sector, reduce its financial costs and help determine the volume of government debt to private persons and cooperatives.
