Debt Clearance, Bank Recapitalization at the Heart of Gov't Economic Plans

EghtesadOnline: Empowering the Iranian banking system in terms of lending, capital buffer and bad debt recovery took center-stage at the latest major economic conference focused on investment and financing, which was attended by the country's top officials.

News ID: ۷۳۹۸۰۲

13 February 2017

Government Spokesman Mohammad Baqer Nobakht announced at the Eighth Conference on Development of Investment and Financing System in Iran on Sunday that in order to increase the lending power of the banking system, public-sector banks in particular, President Hassan Rouhani's administration will take action using two sources.

"[The government] will issue 700 trillion rials ($18.2 billion) worth of bonds to repay its debt to banks and the private sector," he said.

Nobakht pointed to articles 35 and 36 of the budget amendment law, which allows recapitalization of public-sector banks from revaluation of foreign exchange assets as the secondary source, according to Financial Tribune.

There have been many contradictory figures regarding the amount of government debts to the banking sector, but according to the official who also heads the Planning and Budget Organization, the amount stood at 380 trillion rials ($9.9 billion) four years ago while it has now reached 420 trillion rials ($10.9 billion) to 45 trillion rials ($1.17 billion).

"The astronomical figures that are being reported are not the real numbers," Nobakht said, stressing that the government will abide by and act on figures approved by the Audit Organization of Iran.

The government spokesman further announced that 700 trillion rials will be spent to clear the government's dues to eight public-sector banks.

"Up to 150 trillion rials ($ 3.9 billion) will be allocated in the form of bonds to repay government debts to private contractors," he added.

Nobakht said small- and medium-sized enterprises have so far received 148 trillion rials ($3.85 billion) of the 160 trillion rials ($ 4.17 billion) earmarked for them.

According to the official, when the administration took office nearly four years ago, 2,047 major construction projects, along with subsidiary projects, were incomplete.

"A portion of these projects are being finalized," he said, noting that the government also welcomes outsourcing the projects as it has already done in the case of 2,532 projects.

Nobakht said the aforementioned articles of the budget amendment allow the Securities and Exchange Organization to issue 1 quadrillion rials ($26 billion) worth of bonds, which will not be employed until it can prove effective.

Less Bureaucracy to Benefit Investments

Minister of Industries, Mining and Trade Mohammad Reza Nematzadeh also spoke of steps that must be taken to see projects through successfully while stressing the importance of profitable financing.

"The first step consists of studying the projects thoroughly and from all aspects before their implementation, which will save money and reduce the completion time of projects," he said, pointing to regulations as the second step.

"In this part, we must ease the legal regime over investments by reducing bureaucracy and regulations."

The minister cited equity, banking loans, foreign finance, foreign investment, bond issuance, individual investments in manufacturing and employing a combination of methods as suitable ways of financing.

He also warned corporate shareholders that they should not engage in executing a project if they do not have at least 30% of the total funds required for the project.

Emphasizing the importance of foreign investment in bankrolling major projects, Nematzadeh announced that $8 billion of foreign investment have so far been officially approved by the Ministry of Economic Affairs and Finance.

For each point garnered through foreign investment, he said, two points are added to the country's economy.

Focus on Life Insurance

Abdolnasser Hemmati, the head of Central Insurance of Iran, began his speech by comparing the penetration rate of life and other insurance categories in Iran and the world.

"The average penetration rate of insurance throughout the world is about 6," Hemmati said, adding that the penetration rate of non-life insurance in the world is 2.7 while in Iran, it stands at 1.8% "which shows that in the category of non-life insurance, we are not far behind from the rest of the world".

In contrast, he said life insurance registers the highest penetration ratios with an average of 3.8% globally while the same figure is a dismal 0.25% for Iran.

Hemmati noted that the High Council of Insurance Industry has been obligated as part of the sixth five-year development plan (2017-22) to increase the share of life insurance from premium incomes to 50%, "a move which is deemed impossible by some".

That is while, he adds, life insurance grew by 40% during the initial 10 months of the current fiscal year (March 20-Jan. 19) and other categories grew by "about 20%".