Iranian Economist Recommends Borrowing From Future

The Iranian government needs to use debt instruments such as issuing bonds to finance its fight against the novel coronavirus, says Hossein Abbasi, a lecturer in the University of Maryland’s Department of Economics.
Abbasi noted that Iran is neither on top of the list of successful countries in controlling the new coronavirus, nor is it at the bottom of that list. 
“Thanks to their modern management mechanisms designed for times when an unexpected problem crops up, countries like South Korea and Germany managed to dramatically slow the spread of COVID-19. Countries that enjoy a more modern economic system and utilize modern economic instruments are also more successful when it comes to the financial aspects of handling an emergency issue like this,” he told the Persian-language weekly Tejarat-e Farda. 
“There is definitely no government in the world with their money and assets stashed under their pillows. Modern economies tap into resources they will gain in the future to address emergency situations. The United States’ gross domestic product is around $22 trillion. Its government issues bonds worth 80% of this amount to sell to their people and several countries. In other words, the US government’s debts account for $18 trillion of the country’s GDP.”
The economist explained that amid the outbreak of coronavirus, the US government introduced a $2 trillion rescue package which will be provided through borrowing from people. 
“It will sell $2 trillion worth of bonds to people and will pay back its debts from its future income. It is that simple. Such a mechanism of creating money under emergency conditions can provide needed finance overnight. The US pays $600 billion in interest on debts annually but no one worries about that figure because the economic growth of the country is above 2% annually and debt growth is below 2% which means the government will pay its debts in the long run by reducing its expenses and taxation,” he said. 
“That’s the way a modern economy works: people give you the money to spend it now and you’ll pay back the money plus its interest from production and tax gains in the future, a win-win game. The same mechanism is being employed in the EU as well.” 

Doable Financing Approach

Asked whether Iran’s economy has the potential to use this mechanism, Abbasi said, “Once you weigh the numbers and economic indexes, our economy enjoys high potential to use future resources, but when you come to think of the past performance of the government, you’ll doubt its feasibility.” 
He referred to two main indexes that should be taken into account in order to assess a country’s ability to opt for this common debt instrument: debt-to-GDP ratio and tax-to-GDP ratio. 
“Iran’s debt-to-GDP ratio is below 15%; the ratio is at 30% in Turkey; 90% in the US; 185% in Greece and above 50% in developing countries. Tax-to-GDP ratio in Iran is between 6-8%; in Turkey it is 24%; the US 30%; Germany about 50% and in OECD countries, the ratio is 35%. These figures show that our economy has the potential to launch the bond mechanism by selling them to people with a percentage of interest rate and later on pay them back from production and taxation,” he said.  
Abbasi noted that the 6% tax-to-GDP ratio suggests that a big part of the Iranian economy does not pay tax, so if the taxation system were to undergo reforms, the economy can easily tap into the modern financing system. 
“Tax reform does not necessarily require raising tax, rather it means taxing those who fail to pay their fair share. The 6% tax-to-GDP ratio can increase to 20-30% within 10 years,” he said. 
“The fundamental point to ensure the practicality of this mechanism is that interests on the bonds must be paid to creditors completely, without a single error, otherwise the whole system will collapse. The government needs to ensure that the interest on bonds will be transferred to bondholders before paying the salaries of the president or parliamentarians.”

Fast-Track Financing Approach

Asked about a fast-track financing method to bail out low-income households and distressed business affected by the coronavirus, the economist stressed that this mechanism cannot be implemented within one or two months. 
“For overnight financing, there is no option but to use the central bank’s resources. The government can tap into CBI’s resources to meet people’s needs during the quarantine. But it should sell bonds to compensate for losses suffered by businesses,” he said. 
“In order to avert the inflationary effect of selling bonds, the taxation system needs to improve. The time is right for cancelling tax exemptions. The current economic situation is totally unique. All those who are running a business all over the country must have tax identification information on file and pay taxes. This system has been designed and carried out in 100 countries. There is no need to reinvent the wheel. The government only needs to emulate one of the successful systems in the world.”
Admitting that many in Iran’s economy don’t want to pay taxes and like to enjoy exemption under any circumstances, Abbasi said this is a politically-loaded hurdle that must be cleared. 
“Although we need a 10-year period to increase tax-to-ratio from 6% to 20%, it is viable to improve the ratio by 2% in as many years and enable the government to pay bond interests that it must issue now,” he said.
According to Director of Iranian National Tax Administration Omid Ali Parsa, 40% of Iran’s economy are exempted from paying taxes.    
Abbasi stated that printing money and creating inflation as a result of borrowing from the Central Bank of Iran have been employed invariably by Iranian governments over the past four to five decades, no matter how well or bad the country’s economic situation was. 
“But now, under the special circumstances created by coronavirus, the [government’s] financing of all its needs from CBI resources would lead to an inflation rate of over 50%. Is there a way to reduce this inflation? Yes, and that’s by being extra cautious about spending,” he said.
He suggested minimum cash payments must be made to households, enough for them to meet their basic, urgent needs, which withdrawal from CBI is necessary and the ensuing inflation is natural. 
“However, printing money to increase government employees’ salaries by 15-20% should not take place under emergency situations. It is not possible to behave the way you would have acted under a normal situation. Why do we insist on telling people that all is well? Instead we must converse with members of the public and inform them about how troubled the economy really is,” he concluded.