Bonds Can Help Reduce Debt, Deficit

The mountain of debt is one major challenge the government is facing and it would be beneficial for the economy if the government is indebted to the public as opposed to the banks, says a senior advisor to the minister of roads and urban development.

“The previous administration was seemingly saddled with a lack of financial resources at the end of its term that led to the huge debt to the banking system,” Gholamreza Salami told the khabaronline.ir  news website.

The Rouhani administration inherited the debt and deficit “crisis” and set out to address it, he says. “Throughout the world a variety of strategies are used to handle the debt and deficit crises, including use if forex reserves, oil export revenues… But these solutions are no longer effective when oil incomes plunge.”

Under the conditions, there is only one option left and that is for the government to be indebted to the people instead of the banks, Salami says. “The negative economic ramifications of indebtedness to the masses are far less consequential than when the government is indebted to the banks.”

In its most recent official statistics, the Central Bank of Iran said government debt to the banking sector increased significantly in the first six months of the current fiscal year, jumping to 2.041 quadrillion rials ($64 billion). The administration’s debt to the central bank experienced a notable upsurge reaching 636 trillion rials ($19.9 billion).

Salami urged the government to publish Islamic bonds to tackle the problem. Noting that debt is a natural part of all governments, he said when administrations throughout the world are saddled with debt “they tend to face the dilemma by issuing debt securities or taking long-term loans from the people.”

“Governments usually issue treasury bills or participatory bonds in order to meet their financial commitments. These have a 10-30 year maturity and are often renewable,” Salami says. “But what is crucial is that the amount of debt to the people must not exceed 1% of GDP. Higher volumes of debt, however, can be adjusted under a proper economic initiative.”