The only optimal solution to finance the budget deficit is by issung bonds. This is not a half-baked, untested claim; it is the finding of a hundred-year global experience in monetary and financial policymaking.
Ali Saedvandi, a macroeconomics policy advisor and finance professional, prefaced his article for the Persian economic daily Donya-e Eqtesad with these words. A translation of the text follows:
Economists believe that financial, budgetary policymaking should be separated from monetary policymaking. The best tool to separate these two is by tapping into the potential of bonds to finance budget deficit.
In all developed countries, government budget deficits are fixed through bond issuance. It is not strange to solve the budget deficit by issuing bonds; rather “not issuing bonds” is untypical. And untypical moves are usually being taken in our country!
The sale of bonds sheds light on the budget. If the budget deficit is financed only by selling bonds, severe deficits will lead to an increase in interest rates. An excessive growth in the interest rate draws public attention; as a result, people become sensitive about the government’s budget deficit and the increase in unnecessary expenses.
Ultimately, this will lead to the growth and development of the economy in the future. It is right here that you learn why some groups oppose the sale of bonds in Iran. Transparency!
Alternatives to bonds to cover budget deficits have been unhelpful. In the last two years of the previous administration, the Plan and Budget Organization, on the order of then president [Hassan Rouhani], asked the Central Bank of Iran to put petty cash resources at the disposal of the government.
Did anybody notice this and oppose it? Who may immediately notice the adverse consequences of banks providing the government with resources at the instruction of the economy minister? Almost no one!
Debt Ratio, Size of Government
Two points are of utmost importance when it comes to bonds: debt ratios and the size of the government.
Debt ratios: Indebted governments and even companies are not supposed to pay their debts completely and at once; it is key to control the ratio of debt to gross national product. When the government is capable of repaying its previous debts, it will be allowed to borrow again. Statistics show Iran’s debt ratio is low. The ratio of domestic debt to GNP is 28% and the ratio of foreign debt to GNP is 2%. In fact, these debt ratios are one of the lowest in the world for a country the size of Iran.
Size of the government: Given the size of our economy, the government of Iran is one of the smallest governments compared to its GNP. This does not mean that the government’s involvement is low. Ironically, our government has the highest meddling in the economy. Perhaps the statement that the size of the government in Iran is one of the smallest in proportion to the size of the country is interesting to you.
In Iran, we have one government and one satellite government. The government is the institution responsible for governance such as enforcement of law, creation of security and welfare, redistribution of income, education, health and social welfare. The sovereignty of this central government has been weakened in Iran. Its size is 15-20% of GNP, which is considered to be small when compared with other governments. In contrast to this weak and poor government, we have state companies and private institutions that have the support of the establishment.
Who is going to supervise these corporations and institutions? The same weak and poor government? How can the government solve this problem?
Need for Reforms
The government used to inject oil windfalls into the economy as long as it had access to oil revenues and foreign revenues. An increase in the monetary base and inflation was the result of such a course of action.
However, the era of throwing money at problems is over. Now instead of removing obstacles, the government is creating them via the system of permits, incorrect regulations and cumbersome regulations.
The worst of these policies is command pricing; it has enfeebled the supply side of the economy and weakened the competitive economy vis-à-vis the monopolistic sector.
What should be done? Without any doubt, one of our long-term goals is to make the government smaller and more efficient. Now that the capital market is not strong and the housing market is deep into inflationary stagnation, it is not the right time to sell public assets. Despite much ballyhoo, the move to make government’s assets productive has yet to start; even if it starts, it will not be possible to inject resources into the government’s general budget for years.
If we put all of this together, we realize that the rule of law should be strengthened against the semi-government sector by overhauling the government’s budgetary financial system.
We need to reform the economy, which should not lead to the death of the patient instead of resuscitating the patient. Reforming the budget’s financial system is the economic surgery that can have such an outcome. The goal of this reform is the optimal and non-inflationary allocation of resources. More precisely, resources should be spent on more profitable projects.
Presently, the economy is in inflationary mode. Inflationary conditions are one of the main factors that disrupt economic stability. As a result, every government should seek to control the inflation to create stability in macroeconomic indicators. We all know that the government’s budget deficit is the cause of inflationary conditions in Iran.
The solution to the budget deficit is bond issuance. When it comes to controlling inflation, bonds are instrumental in all developed countries. This tool can also be effective in controlling inflation in Iran, especially because the ratio of domestic and foreign debt in Iran is low in proportion to the size of the country’s economy. As a result, it is possible to issue bonds to get rid of inflation and restore economic growth.
In addition, the size of the central government is relatively small; it needs financial resources to apply the rule of law. The fact is that the government has lost its power for years; it has become small and weak against semi-governmental companies and institutions.
Reforming the financial system is vital. More precisely, the necessity of issuing bonds to promote transparency and change the structure of government expenses to reform the financing system has become imperative.
It should be noted that selling bonds is a non-inflationary tool in the hands of the policymaker to finance the deficit; it is like a brand new car at the disposal of a driver. If this car falls into a valley, it is probably the fault of the driver.
Bonds, policymaker and the executor of policies face the same fate. Bonds have worked in all the countries of the modern world; it was probably the problem of policymakers when they didn’t.
