Debt dominates the global economy, both due to security and policies in global finance that favor debt over equity. Bonds are one of the two main sources of government revenue, along with taxes.
In Iran, however, abundance of revenues from the sale of natural resources, chiefly oil, and Sharia-compliance issues have stifled the growth of debt markets.
Now the government is paying new attention to debt financing. A combination of economic crisis and tumbling crude oil prices, from over $100 per barrel one and a half years ago to under $50 per barrel, has left the government incapable of paying its debts. This has prompted it to issue bonds to start a government debt market.
The Iranian government has an estimated total of 3,800 trillion rials ($110 billion at market exchange rate) of debt. Of these, 1,410 trillion rials ($40.9 billion) are owed to private persons and institutions while 664 trillion rials ($19.3 billion) are owed to public non-government organizations like the Social Security Organization, which provides coverage to wage-earners and salaried workers as well as voluntary coverage of self-employed persons.
However, the government’s biggest creditors are banks, to whom 1,720 trillion rials ($50 billion) are owed.
These swaths of unpaid debt are part of the reason behind meager economic activity and low levels of lending and liquidity in banks. To repay them, the government is issuing various forms of sukuk, or Islamic bonds. The most in vogue sukuk include Musharakah and Ijarah, which have a one- to five-year maturity and pay interest annually or quarterly.
There are also Islamic Treasury Bills sold at a discount to their face value and are redeemed at maturity by the government. These were first introduced last summer and have shorter maturity dates. They were used to repay government’s debt to its contractors.
The government plans to issue 670 trillion rials ($19.4 billion) of debt securities in the current fiscal year (March 2016-17). Most of them will end up on the board of the Iran Fara Bourse over-the-counter market.
IFB is expanding its offerings rapidly. While it leaves large companies to its larger older brother, Tehran Stock Exchange, it has a market for Intellectual Property, one for investment vehicles like Exchange Traded Funds, Housing Mortgage Rights and Exchange-Traded Project Funds, not to mention a stock floor with almost the same trading volume as TSE.
The market will soon be dominated by debt. IFB’s money market is worth 46% of its 959-trillion-rial ($27.8 billion) market value, already. The Tehran-based exchange’s equity market was worth 554 trillion rials ($16.1 billion) on Monday.
With further government bond sales this year, the market will shoot up in size. Amir Hamouni, its chief executive, says his exchange can handle the traffic.
The debt market is favored by institutional investors, foreign and domestic, especially Islamic Treasuries, as their repayment is guaranteed by the government.
“Redeeming these securities at their face value has a high priority among government commitments, meaning the government equates it to paying wages of its personnel,” said Hamouni.
The Economy Ministry has also created a unit to calculate and manage government debt, as currently there is no clear record of the exact sum owed by the Iranian government and its companies.
IFB’s rise to prominence and the advent of a money market in Iran does little to diminish the bloated role of banks in the Iranian economy. Iranian banks held 9,900 trillion rials ($287.8 billion) in deposits and lent over 7,500 trillion rials ($218 billion) of loans by January 20, according to central bank data. Bonds have a long way to go.
