The government plans to get 275 trillion rials ($7 billion at market exchange rate) of the 3,711 trillion rials (about $95 billion) it needs for the next Iranian year's budget by selling bonds.
The new Iranian year starts March 20, 2017.
The administration of President Hassan Rouhani plans to issue 75 trillion rials ($1.9 billion) of Islamic Treasury Bonds and 200 trillion rials ($5.1 billion) in various sukuk, bonds compliant with Islamic contracts, to repay overdue debt to government contractors and finance its operations.
Surprisingly, the amount of treasury bonds the government wants to sell is the same as this year.
Borrowing through bonds is gaining popularity with the government. Though, due to the immaturity of Iran's bond markets, the government cannot rely heavily on borrowing, making petroleum sales and taxes in addition to borrowing from banks the main sources for government revenue.
President Rouhani submitted the budget bill for the next fiscal year to parliament on Sunday. The total budget is 10.6% over the 3,354-trillion-rial budget passed into law for the current year.
Also, government companies, banks and for profit organizations that had 6,828 trillion rials ($175 billion) of cash this year will get 7,565 trillion rials ($193.9 billion) of funds to finance their operations.
Islamic Treasury Bonds are underwritten and given to government contractors in lieu of overdue payments. After they open for secondary trading on Iran Fara Bourse, contractors can encash them by selling to a third party. They mature within a year.
ITBs are sold at a discount to their face value and bear no coupons, meaning they are traded at a lower price than their face value, but are redeemed at face value on maturity.
The Iranian government started giving bonds to contractors to revive industries that have frozen up because they are owed to by the government last September. The introduction of these bonds to Iranian markets was taken as a welcome sign in the development of money markets last year.
The bonds have had ample demand in a market where low risk securities are scarce.
Poor stock market performance and low business investment have ramped up demand for debt securities. Investors are looking for safe havens, after their hopes of swift economic recovery on the back of booming foreign investment was squashed by caution exercised by European lenders.
Major European banks remain reluctant to do business with Iran, even after sanctions against the country were removed. They are avoiding processing dollars for Iran for fear of prosecution by US authorities for breaking remaining sanctions against Tehran.
