Iranian Gov’t to Issue Bonds Worth Nearly $900m

The government is kick-starting its winter borrowing to finance yearend spending. The Iranian fiscal year ends mid-March.

The administration is starting with Islamic Treasury Bills and Ijarah sukuk.

Vice President Es'haq Jahangiri asked the Planning and Budget Organization on Monday to prepare for issuing 10 trillion rials ($254 million at market exchange rate) worth of Islamic Treasury Bills to finance fiscal spending, Securities and Exchange News Agency reported.

The PBO, which is charged with planning and overseeing fiscal spending, guarantees the ITBs, which are short-term bonds like US treasuries. They are sold below face value and bear no interest coupons.

The government introduced ITBs two years ago and their issuance has surged ever since—from 6 trillion rials ($152 million) in their first year to 50 trillion rials ($1.27 billion) last year and a planned 120 trillion rials ($3 billion) this year, Mehdi Banaei, who is charged with managing the government's debts, was quoted as saying by IRNA.

> Ijarah Sukuk

The administration also borrows through sukuk, bonds based on Islamic contracts, to complement ITBs and help repay overdue claims by government contractors. Some of the most widely used forms of sukuk are Ijarah, Musharakah and Murabaha bonds.

On Sunday, the Cabinet gave the go-ahead for issuing 25 trillion rials ($635 million) in Ijarah bonds to repay its debt to municipalities, SENA reported.

Ijarah bonds, basically, exchange the future proceeds of the issuer's assets for a lump payment. They are the most widely used form of the 14 existing types of Islamic bonds. In Iran, they were first introduced in 2011.

Delays and Debt

Delays in the payment of government debt have grounded the Iranian economy to a halt. Many contractors abandoned state projects due to funding shortages. Some have gone bankrupt.

Yet, the actual amount of debt is unknown, even to the minister of economy who recently organized a taskforce to verify sums owed by the government and its companies to creditors and contractors.

Current estimates show the government owes over 3,800 trillion rials ($96.5 billion) to private and public companies, as well as banks.

The administration lacks the cash to repay contractors and get its projects going again, due to bloated current expenses, weak growth in industries and oil revenues that are a fraction of the windfall gains of the late 2000s.

The government's weak fiscal position, which has forced it to slash investment along with the pileup of overdue debt, has had far reaching effects. Job creation has stalled and household incomes have fallen. Banks have had to offer interest rates in the high 20s to cover the costs they incurred from having their funds locked up in infeasible state projects.

The administration is trying to reverse the cycle and repay its overdue debt, while forcing banks to offload their bad debt in an orderly fashion.