Proposal to Clear $11b in Iran Government Arrears

Majlis Joint Commission, the body responsible for reviewing the budget bill before its final parliamentary ratification, has approved the inclusion of a clause in the fiscal 2018-19 budget that would see 500 trillion rials ($11.49 billion) of government arrears to private contractors to be cleared through a multilateral debt swap.

The scheme reportedly involves the government as the main debtor, private businesses, banks and the Central Bank of Iran.  

"If this leads to a final result, a part of the problem will be resolved and the years-long debts of the government to the private sector will be cleared," Masoud Khansari, director of the Tehran Chamber of Commerce, Industries, Mines and Agriculture who broke the news, said on Tuesday.

Addressing the latest board of representatives meeting of the private sector assembly, Khansari said the government's proposed budget bill for the next fiscal year that is currently under review is a good opportunity to reimburse the administration's liabilities and alleviate the burdens of many private sector players and businesses–many of which are on the brink of bankruptcy.

"It is our request from the government and Majlis that the issue of clearing government payment arrears to the private sector is addressed in the budget bill," he said.

Late November, in a letter to the head of Planning and Budget Organization, Mohammad Baqer Nobakht, Economy Minister Masoud Karbasian proposed a trilateral swap deal among the state, private sector and banks, which was welcomed by the head of Iran Chamber of Commerce Gholamhossein Shafei who wrote a missive of his own to the minister to announce his support.

However, in his remarks on Tuesday, Khansari spoke of a deal involving the central bank as a party to the agreement, which would mean that either the government or the parliament has added the monetary regulator to the equation.

The parliament emerges as the most likely candidate, as its research arm on Sunday published its latest analytical study and advocated the debt swap scheme that Khansari was referring to.

MRC Proposal

The Majlis Research Center in its report reviews the volume of liabilities owed by the government and state-owned companies, and the potential impact of including the central bank in the affair, and ends up proposing a "chain settlement" scheme.

According to the think tank, by the end of the third month of the current fiscal year on June 21, the government owed about 1 quadrillion rials ($22.9 billion) to the private sector and cooperatives while its liabilities to public non-government entities reached 1.1 quadrillion rials ($25.2 billion).

Debts of the government and state-owned companies to the banking system were respectively 667 trillion rials ($15.3 billion) and 567 trillion rials ($13.03 billion) by that time.

Banks also owed more than 1.1 quadrillion rials to the central bank.

"Because of the significant debts of the government to state-owned companies affiliated with the ministries of energy and agriculture because of subsidies, it is proposed that a chain consisting of five links, namely the government, state-owned companies obtaining subsidies, private sector, banks and central bank be formed," the MRC suggested.

By using this method, the monetary base of the central bank will remain unchanged and government liabilities would strictly be replaced with the banks' debts to the central bank in its balance sheet, it says.

As to why the method would be highly beneficial, the parliamentary entity notes that in the trilateral debt swap scheme, the liabilities of banks to the government would emerge as a bottleneck, because in spite of the government's high debts to the private sector and non-government public entities and in turn their high debts to the banks, the debt swap would only be possible up to the ceiling of the banks' debts to the government.

However, MRC declares that if the central bank were to be added to the equation, the volume of clearable debts would increase dramatically (up to 1 quadrillion rials).

The research center notes that adding the central bank to the cycle of debt clearance would improve the situation of businesses, develop more investments and create jobs.

It would make things better for the banks as it would lessen the heavy burden of their non-performing loans–the main reason behind their acute credit crunch in recent years, the report said.

Finally, it would considerably reduce government liabilities to the non-public sector, decreasing its financial costs, and help determine the exact volume of the government's debts to private persons and cooperatives that, contradictory to official figures, have been estimated to be anywhere between 3.5 quadrillion rials ($80.03 billion) and 7 quadrillion rials ($160.1 billion) in the past and strengthen the standing of the Central Bank of Iran.