Islamic Treasury Bill trading hit a record on Wednesday, as trade volume for the newly-debuted bill exceeded 56 billion rials ($1.54 million at market exchange rate) for the first time, which is a sign of the growing market for the bills.
The large volume of trade in the Sharia-compliant government bonds topped all other assets on the Iran Fara Bourse over-the-counter market, according to SENA–the news website for the regulator Securities and Exchange Organization.
The rise in Islamic Treasury Bill was in stark contrast with the near 40% drop in trade volume on the IFB this week compared to the previous week. Over 305 million securities worth over 3.3 trillion rials ($92.2 million) were traded on the IFB last week.
Total trading value of the bills had reached 1.15 trillion rials ($431.46 million) on December 15, according to a report by IRNA, citing IFB’s deputy for market expansion, Reza Gholamalipour.
To Repay Debt
The Iranian government issued its first-ever T-Bills on September 30. The one-year bills were offered to contractors in lieu of payment.
Crucially, the effective interest rate on the bills has been higher than the official bank deposit rate cap set by the Central Bank of Iran, which is about 20%. The bills were offered to investors at a steep discount.
Iran’s economy is heavily dependent on its banking system, which is hampered by large levels of bad debts, punitively high interest rates and double-digit rates of inflation.
Iran’s chief treasurer says the Ministry of Economic Affairs and Finance has raised 40 trillion rials ($1.09 billion) by selling Islamic Treasury Bills so far.
The government of President Hassan Rouhani is struggling with debts it inherited from its predecessor. Tehran owes over 1 quadrillion rials ($29 billion) to the banking system plus an additional 550 trillion rials ($15 billion) and is facing a squeeze on funding due to falling oil revenues and the impact of sanctions.
Iran’s economy started growing last year after three successive years of contraction, but it has slowed this year and many Iranian economists predict a deterioration due to weak domestic demand.
More to Come
The Central Bank of Iran is allowed by the Monetary and Credit Council—a decision-making body—to issue 100 trillion rials ($2.7 billon) of bonds in the current year to the end of March 2016, if needed.
Chief treasurer Rahmatollah Akrami said earlier this month that the government plans to sell more bonds in line with budget law.
“We are issuing these bonds to repay government debt to non-government contractors as part of the 2015-16 budget law,” he said.
State-owned lender Bank Melli Iran is handling the bond issue, the funds from which will go to the Energy Ministry.
The bills are not the government’s first use of debt financing, however. Various branches of the government have issued sukuk, Islamic bonds, to finance their expansion projects over the years.
The central bank has been kept at an arm’s length from the bonds to avoid making it the government’s piggy bank, as before. The bank has been banned from trading them.
The government should very well allow the central bank to dabble in the treasury trade in the future, but only after both fiscal and monetary authorities have earned a reputation for prudence.
