Gov't Bonds Not to Blame for High Interest Rates

As the government's issuance of bonds has become a talking point in the controversy surrounding high interest rates, a deputy economy minister said although bond yields could affect bank rates, the debt market should not be blamed for the predicament.

"Bonds surely influence the economic cycle, as they do throughout the world," Hossein Mirshojaeian also told ISNA in response to a question regarding the effect of government-issued bonds on bank interest rates.

However, he referred to a lack of sufficient resources as a major part of the problem, which has been caused by a credit crunch and sour assets that prevent the rates from going down.

Under the circumstances, a kind of "excess demand" takes form based on which everyone wants loans the banking system is unable to provide.

Mirshojaeian noted that there are usually two kinds of bonds: short-term low-yield bond published by the government and long-term high-yield bond issued by the private sector.

The Iranian government last year published bonds with high rates because they needed an immediate source of financing.

As the deputy economy minister says, the government took the decision to sell its debt carefully and in a calculated manner.

"If the government is unable to fulfill its commitments, it will not be able to issue bonds in the future, as no one would buy them and this underscores the importance of the government's reputation as it needs to think in the long term," he said.

As to the yield of the bonds, Mirshojaeian said "we did not put a yield on it" but the market did.

They are now "being sold below nominal value", he added, noting that the bond yields went as high as 25% at one point and are now at 22%, which is closer to bank interest rates (currently around 20% in spite of officially being set at 18% by the Money and Credit Council.)

The government introduced Islamic Treasury Bills some three years ago and their issuance has surged ever since.

Asked about whether he is a proponent of a decline in bank interest rates, the official asserted that at such high rates, no revival for the ailing production sector can be imagined.

"Which business do you know of that can survive at 30% rates?" he said.

Debt-to-GDP Ratio

The deputy economy minister also spoke of the ministry's plans for bonds as some have criticized their role in curbing bank interest rates.

According to Mirshojaeian, the government will employ Debt Sustainability Analysis.

Debt Sustainability Analysis is a tool used as part of a framework developed by the World Bank and the International Monetary Fund to help guide countries and donors in mobilizing critical financing for low-income countries, while reducing the chances of an excessive build-up of debt.

That is while, adds Mirshojaeian, the administration will focus on keeping its debt-to-GDP ratio under 40%. He said Economy Minister Ali Tayyebnia is authorized to call for a 5% increase in the ratio while the parliament has a say in approving another 5% if necessary, but "even then, measures must be devised to bring it back below 40%".

At the 27th annual Conference on Monetary and Foreign Exchange Policies, Central Bank of Iran Governor Valiollah Seif referred to "an unprincipled competition over bank interest rates" among lenders, saying it was exacerbated by the entry of bonds published by the government to clear its debts.

In conclusion, Mirshojaeian said he is against a reduction in bank interest rates by way of official directives, as it has not worked so far and will not work in the future.