The Iranian parliament has called for a pause in issuing government bonds on capital markets, accusing the government of President Hassan Rouhani of using the bond market mechanism to shift debt to future administrations. Rouhani’s financial team began issuing Islamic treasury bills, among other bonds, in February 2015 in an effort to pay off part of Iran's 5,120 trillion rials ($158.3 billion) in accumulated debt. Critics argue that the administration is actually not paying off debt through this approach, but is only postponing repayment.
“The government is in a debt spiral, building debt on debt,” Speaker Ali Larijani said at a recent parliamentary session, according to a Feb. 7 report in Iran's leading economic newspaper, Donya-e Eqtesad. The conservative speaker said he believes the bond market is not a reliable instrument for addressing budget deficits, calling instead for the administration to curb “overspending.”
The proposed budget bill for the Iranian calendar year beginning March 21 is still being discussed in parliament. It is to be approved in a few weeks. Despite the moderate bent of the parliament, a number of lawmakers, including the speaker, have criticized the budget for overspending. Larijani said in a surprising comment that almost two-thirds of the next year’s spending is excessive.
Pro-Rouhani experts see these criticisms as politically motivated. Hassan Khoshpour, former manager of the Management and Planning Organization, wrote Feb. 7 in Donya-e Eqtesad that there have always been issues with budget planning and that overspending and deficits are nothing new. Trying to ascertain why parliamentarians are therefore blaming the Rouhani administration for what are essentially long-standing issues, he concluded that interference by lawmakers in the planning process is one of the reasons behind Iran's budget-planning failures.
For the coming fiscal year, the administration has suggested raising funds through selling “sukuk,” Islamic bonds, to finance 10% of the likely budget deficit. Indeed, the administration is set to spend the raised money to repurchase bonds that are expected to mature in the upcoming year and also to pay off interest. This is where the two sides disagree. Larijani does not want to use the bond market to resolve the deficit issue, arguing that the administration would be increasing its debts by 10%, not paying it off.
The government — which has issued 80 trillion rials ($2.4 billion) in Islamic bonds on the over-the-counter (OTC) market so far this year — has stopped issuing new bonds. Amir Hamouni, CEO of Iran Fara Bourse (IFB), announced Feb. 6 that the government will not issue bonds through the IFB, Iran’s OTC market, for the remainder of this fiscal year, which ends March 20. He said that for the next fiscal year, only a limited number of bonds, whose issuance has already been planned, will be available. Hamouni further said the Central Bank of Iran (CBI) will be legally authorized in the next year year, or the years after, to handle the bonds. The CBI’s role in the money market has raised eyebrows among liberal economists. A Feb. 8 report by Donya-e Eqtesad attacked the decision, warning that it could result in less transparency in the bond market.
The idea of putting the bond market on hold arose after capital market officials expressed concerns about ongoing losses in equity markets. Some officials believe that the high returns on government bonds, between 20% and 25% in the past couple of years, have reduced the attractiveness of stocks, resulting in losses for many investors trading in equities. Given the CBI’s 15% rate cap for bank deposits and the weak stock market, the bond market has come to be one of the most popular investments. This has worked against the interests of banks and equity markets, with investors naturally preferring high-interest bonds.
Although the net value of Islamic treasury bills issued this year accounts for less than 1% of total capital market value, it seems that rising pressure from equity market officials on the one hand and lawmakers on the other will eventually lead to the handover of the bond market to the CBI. The bank, however, must first prepare the legal grounds for such a measure.
Under current laws, secondary trading of participation bonds, murabaha (a type of Islamic bond) and Islamic treasury bills can only be conducted on the Tehran Stock Exchange and the OTC market. This must be changed. Aside from the legal barriers, financial experts are warning against higher transaction costs and an increase in bureaucratic paperwork for banks if the CBI takes control of the bond market from the capital market. That might make government bonds less attractive to investors, economists say. At any rate, assigning a new task to a banking system already suffering from financial constraints could be harmful.
For now, the parliament has not entirely ruled out the use of bonds. On Feb. 19, lawmakers approved laws that would allow the government to issue around $9.2 billion in participation bonds, Islamic bonds and Islamic treasury bills for various sectors, including the oil industry, for the coming year. However, this figure is far lower than the 800 trillion rials ($24.6 billion) in bonds proposed by the government.
The main problem with the bond market is that the government uses the cash it raises from it to meet short-term needs. Indeed, the funds raised so far have either gone toward projects that have brought in little to no return or were spent to cover annual budget deficits. In this sense, lawmakers have a point.
The question going forward, however, is how the CBI will make a difference in terms of managing the bond market if its aim is to raise funds at lower costs while keeping the market attractive to investors. Moreover, perhaps the greater challenge involves how the CBI can change the government’s approach to thinking long-term at a time when it is deeply worried about short-term issues, including funding ongoing deficits.