MRC Urges Restraint in Gov’t Bond Issuance

The research arm of the Iranian Parliament has warned against the detrimental effects of the government engaging in a widespread issuance of bonds, especially on bank interest rates, and proposed that the Central Bank of Iran act as the official watchdog of the bonds.

In its latest report on Tuesday, Majlis Research Center analyzed the monetary and banking sections of the fiscal 2018-19 budget bill that is pending the ratification of lawmakers, and sounded the alarm on the repercussions of excessively indulging in the issuance of Islamic Treasury Bills.

From the fiscal 2014-15 onwards, a decrease in government revenues from oil and divestiture of state-owned companies resulted in a considerable budget deficit, prompting the administration to issue bonds, which trend has incrementally grown and comprises a significant volume of government debts in the form of bonds in financial markets.

"Apparently, this has turned into a tradition in annual budgets and each year a higher percentage of bonds are issued to cover the reimbursement of previous bonds that have now come to maturity," the MRC writes in its report.

In the fiscal 2016-17 budget bill, the administration generated 400 trillion rials ($9 billion) from the sale and divestiture of various kinds of Islamic bonds and allocated more than 142 trillion rials ($3.22 billion) of resources to repay the original amount of bonds, meaning that it was left with more than 257 trillion rials ($5.84 billion).

For the current fiscal year, it will earn 345 trillion rials ($7.84 billion) and spend more than 145 trillion rials ($3.29 billion), leaving it with more than 179 trillion rials ($4.06 billion).

In the fiscal 2018-19 budget bill, it has predicted 385 trillion rials ($8.75 billion) in revenues and more than 26 trillion rials ($590 million) in expenditures, bringing its final yields to a significant three-year low of close to 125 trillion rials ($2.84 billion) which is almost half of what it earned in the previous fiscal year.

Some experts believe that because the bonds constitute a relatively meager share of the Iranian financial markets, their volume is still a comfortable distance away from any dangerous threshold.

However, as MRC says, many believe that because of supervisory problems coupled with the structural issues of markets, high interest rates on the bonds, lack of transparency and lack of liquidity in government and state-owned companies' debts, the market cannot cope with this volume of bond issuance that will give rise to negative repercussions for the economy.

"Releasing this volume of financial bonds will decrease their value and increase their interest rates, which will cause bank interest and deposit rates to go up," the report warns.

It adds that in the budget bill, the bonds will only worsen the situation of businesses, especially small- and medium-sized enterprises, in light of reduced lending power of banks and high interest rates of about 18%.

According to MRC, the government will drive up the interest rate of bonds in an unhealthy competition with the private sector, which will further drive up bank interest rates. Furthermore, due to a crowding-out effect caused by the government's increased entry into the markets, the private sector will have less access to financial resources.

"This increase in the interest rates of bonds would undermine the current policies of the central bank in line with decreasing bank interest rates, leading to worse conditions for the debts and assets of banks in their balance sheets," it said.

That is not to mention the adverse effects the high-interest bonds will have on the capital market and the fact that the government will be forced to issue more bonds each year to compensate for its debts as was evident in the preceding budget bills.

Excluding the Monetary Regulator

In the next fiscal year's budget, the government has proposed that a committee consisting of the head of Plan and Budget Organization, the economy minister and the governor of the central bank manage the potential consequences of publishing the bonds and set their nominal interest rates, which move was undertaken by lawmakers in the previous annual budget, although with an additional member.

The government has removed the representative of the parliament–a member of Majlis Economic Commission–in its proposed committee.

The administration has also added two clauses, one of which expands the responsibility of the committee to include all bonds, namely rial and foreign exchange bonds, and the other decrees that all bonds issued to clear previous government debts are exempt from being reviewed in the committee.

Forming such a committee would mean "weakening and even worse, completely taking control of the monetary regulator [central bank]", warns the MRC, and stresses that the central bank is the entity in charge of setting the interest rates on bonds as per its natural mandate.