The government is planning to tap into the bond market to clear its debts and improve the manufacturing sector, Masoud Nili, a senior economic advisor to President Hassan Rouhani said Tuesday.
Addressing the Fifth Annual Conference on Monetary and Fiscal Policies, hosted by Financial Tribune's sister publication Donya-e-Eqtesad at the Iran Banking Institute in Tehran, Nili said the government will start issuing bonds in the next fiscal year (starts March 20) as part of the five-year economic development plan (2016-21) to control the money supply and curb inflation.
"Bonds will be issued in four main categories: one-year Islamic Treasury Bills (its version of short-term sovereign debt), government bonds to restructure government debts to contractors, participatory bonds to finance government schemes and Sukuk,” Nili said, adding that banks will be the first recipient of the bonds.
According to Abbas Akhundi, minister of roads urban development, the latest data puts government debt at 5.4 quadrillion rials ($178.7 billion), which is almost 50% of national GDP. These include the government’s own debts, debts of government-affiliated companies debts and money owed by the National Iranian Oil Company.
Governments' budgets have been traditionally based on the available cash rather than credit, according to the minister. He called for a new mechanism to revive the government’s credibility in the market, by setting a debt ceiling and redefining a structure for debts.
“We need to be more transparent on the amount of debts,” he said. “However, it's not only the amount that matters, rather it is their variety and layers,” he said.
Chain Reaction
Nili said the banking system accounted for the biggest share of debt mountain and blamed the previous government for securing loans for diverse sectors that in turn fueled the debts of banks to the central bank and government debts to the banks.
“Even when the government was banned from borrowing from the central bank, it went to the commercial banks for loans and fell into the same trap,” the senior economist told the conferees.
One lasting solution to the seemingly unending debt crisis is that “The government stop borrowing from banks.”
"Government debt has stoked the credit crunch in the banking system, preventing banks from giving credit" to the companies in need."
He listed pension funds, like those for government employees and armed forces as other reasons for the surge in government debts—something he said has become a major challenge for the administration.
“Due to increase in the population in the past decades and lack of a proper pension system, governments have not been able to efficiently manage the pension costs,” he complained.
According to the official, poor planning for development projects also added to the huge pile of debts to contractors. No contract has been signed with the contractors and no repayment date has been set, so they have no choice but to wait until the government repays them.
He referred to the sanctions, plunge in oil revenues and the subsidy reform plan as the main factors contributing to government debts.
Debt Market
The governor of the Central Bank of Iran, Valiollah Seif, welcomed the launch of a debt market and the issuance of bonds as it “helps the CBI promote transparency. He also said the regulator would use it as a tool to indirectly manage the markets.”
“Iran's debt-to-GDP ratio is about 25%, which shows we have good potential to launch a debt market, but the measures should be taken with caution, to avoid bad results in the future,” Seif said.
The senior banker asked for transparency in data. “The Management and Planning Organization says the government owes 600 trillion rials to the banking system, whereas the banks’ own estimations put the figure at 1.1 quadrillion rials.”
Banks account for 90% of the financing in the country, according to Seif. “Tight money is mainly caused by the government debt as almost 50% of banks' resources are soured and unusable.”
"Poor condition of financial markets, and the stock market as well as banks’ involvement in non-banking operations is also causing problems for financing, "he said adding that “A debt market would help reduce banks' footprint in the national economy.”
“We have defined a specific ratio for banks' non-banking activities but state-owned lenders misused this process by selling their assets in lieu of their debts."
Seif added that management of interbank rates is also necessary to enhance efficiency of fiscal and monetary policies.
“The CBI started to intervene in the interbank market last November, when the rates were around 29%. However now it has been lowered to 18.5% and will keep declining to get closer to the rate of inflation.”
Fresh Look (to be merged)
Abbas Akhoundi, minister of roads and urban development, however, preferred to look at the issue through the lens of political economy—the subject he has majored in.
“I think the country is dealing with four major crises, government debts, and toxic assets in the banking system, financing welfare programs as well as nonbanking operation of banks,” he said.
Wrong implementation of the privatization scheme, subsidies reform plan and financing construction projects changed the country's economic landscape,'' he said, “A policy should be made based on a clear understanding of the country’s economy.”
Akhoundi called for identifying the real causes of the credit crisis and changing "our outlook" to make the solutions work.
"We cannot design policies suitable for a market economy while in reality our economy is not yet market-based," he said.
Akbar Komeijani, CBI vice governor, also noted that curbing the inflation rate has not been CBI’s only focus and it has been trying to pay close attention to economic growth as well.
“The country’s monetary base during the twelve month ending January 20 was up by 27.2%, which is indicative of economic growth when inflation in fact has declined,” he said.
Official data says inflation presently is hovering around 13%, down from the 40% when President Hassan Rouhani took office in the summer of 2013.
