The Iranian government opted in mid May to issue domestic bonds to fill the enormous budget deficit that is expected in the current year. The plan is to sell a total of 2,400 trillion rials in new bonds (equal to about $13.5 billion at the free market rate). Incidentally, the current state budget already included the issuance of 900 trillion rials in domestic bonds and the government plans to secure the approval for an additional 1,500 trillion from the Economic Coordination Council — i.e. the heads of the three branches of power — to use the same tool to fill the expected budget deficit. Yet what the overall impact will this policy have on the country’s economy?

The first criticism of this approach is that the government’s calculations are based on the volume of the anticipated budget deficit and not on whether the economy can absorb this size of bonds. In fact, the total volume of domestic bonds that the government has issued in the past decades is less than the figure for the current Iranian year. To put the government plans in perspective, it should be noted that the above figure would equal 10% of the economy’s liquidity at the end of the past Iranian year, March 19. This volume of government debt within one fiscal year is unprecedented, but it is needed in light of the current financial bottlenecks caused by sanctions, low oil prices and the COVID-19 economic downturn. 

Experts agree that domestic bonds are not an ideal tool for financing a budget deficit, but considering the fact that sanctions restrict the ability of the Iranian government to access its international funds or to issue bonds on international markets, it is one of the few choices that remain. 

At the current juncture, these bonds could be viewed as an instrument to attract some of the capital that has been heating the stock markets, but to do so, the government needs to offer interest rates that will attract that capital. Currently, domestic bonds in local currency fetch 14.5% annual interest, compared with bank interests that vary between 15% and 18%. These rates pale in comparison with the annual inflation, which is estimated to stand at 30% in the current Iranian year. As such, investing in hard currency or gold are safer bets for investors who wish to beat inflation. Furthermore, from an investor’s point of view, the performance of the Tehran Stock Exchange is more attractive, though higher risk compared to bonds. The government bonds are targeting low-risk investors, but it is unclear whether this volume would be absorbed by such investors.