The government plans to issue 670 trillion rials ($19.3 billion at market exchange rate) worth of Islamic bonds (sukuk) this year (started March 20), to repay its debt to state contractors and banks estimated at 3.8 quadrillion rials ($109.7 billion), a deputy economy minister said.
Mehdi Banani added that the delay in their payment has ground business lending to a halt.
Last year, the government sold 50 trillion rials ($1.4 billion) worth of sukuk to investors and used the proceeds to repay debt owed by the Energy Ministry and the Roads and Urban Development ministry, IRNA reported.
"The accumulation of government debt is one of the most important problems that has systematically created ripples in the economy in recent years," he said.
Banks have had to lend less in recent years, as their money was locked up in bad loans given out to risky clients and government companies who defaulted on their loans. Banks lend so these clients can pay off their previous loans and banks avoid writing the loans off as losses.
Renewing loans is taking a heavy toll on bank assets. Last year, over 80% of lending by banks went to repay outstanding loans that banks have little hopes of recovering anytime soon.
This shortage of money and the ensuing competition to attract as much deposits as possible have driven up interest rates. Forceful attempts by the Central Bank of Iran to cut rates have met little success in the last year.
The government hopes repayment of its dues will increase liquidity of banks, prompting them to lend more. With new money becoming available to banks, they can lend at lower rates that businesses can actually repay. Interest rates on loans currently start from 22% per annum.
