Commission Sets Cap for Bond Sales in Next Fiscal Year

EghtesadOnline: The Majlis Joint Commission has given the nod to most of the government’s proposed figures in the budget bill for the next fiscal year (starting March 21) regarding the issuance of Islamic debt securities.

News ID: ۷۴۴۶۲۱

10 January 2018

“During its Sunday meeting, the commission decided to allow state-owned companies, ministries, universities, higher education organizations and science and technology parks to issue up to 70 trillion rials ($1.61 billion) worth of sukuk,” the commission’s spokesperson, Ali Asghar Yousefnejad, said.

The funds raised are to be used in “economically and technically feasible” development projects designated by the government’s Economic Council.

The joint commission is a parliamentary body responsible for reviewing the budget bill as well as five-year development plans proposed by the government, according to Finncial Tribune.

The government was also given the go-ahead for issuing 260 trillion rials ($6 billion) worth of debt securities to complete unfinished projects, develop universities and implement provincial projects.

Any of the two types of sukuk left unsold can be handed over to government creditors such as project contractors, consultants and equipment providers.

Municipalities and their subsidiary companies can also issue up to 80 trillion rials ($1.84 billion) of bonds. At least 50% of the money raised must be allocated to the expansion of urban rail transportation.

And finally the commission allowed the government to issue up to 15 trillion rials ($346.42 million) of Islamic Treasury Bonds with a maturity period of three years to hand over to its creditors, including but not limited to project contractors, farmers involved in guaranteed purchase of strategic agricultural products, health insurance companies and electricity producers.

This is while the budget bill drafted by the government projected the issuance of ITBs worth 95 trillion rials ($2.19 billion), making this the only clause to be cut down in size by the parliament.

Decisions made in the joint commission need the approval of lawmakers and the verification of Guardians Council before they are enforced.

More Cost-Cutting, Less Debt

Lawmakers are concerned that the government is becoming increasingly dependent on raising money by issuing debt to cover widening budget deficits while showing no signs of cutting expenditures.

“The fact is that issuing debt securities requires a dependable source of revenue for future payback, otherwise this will not be acceptable for covering necessary government spending,” a member of the joint commission, Fatemeh Hosseini, wrote in an article published in the Persian economic daily Donya-e-Eqtesad.

Hosseini emphasized that debt issuance to cover budget deficit was an exception, but the practice is becoming more and more commonplace.

“This was first introduced in 1394 (2015-16 fiscal year) … for accelerating the movement out of an economic recession … but was unfortunately repeated in the following years’ budget bills,” he said.

The parliament’s original premise to allow government debt issuance, the MP argues, was to revive dormant development projects, but it has since deviated into a tool for keeping the messed-up government finances afloat.

The Central Bank of Iran’s latest budgetary report shows the government’s budget deficit came in wider than expected in the first seven months of the current fiscal year (March 21-Oct. 22) to reach 223.9 trillion rials ($5.3 billion).

Overall revenues during the period amounted to 330.6 trillion rials ($7.9 billion), posting a rise of 88.6% over last year’s corresponding period while spending hit 554.5 trillion rials ($13.25 billion) and registered a 31.1% rise year-on-year.

To cover the widening deficit, the government has been issuing bonds. According to CBI, 349.2 trillion rials ($8.31 billion) worth of bonds were issued during the seven-month period, 25.3% more than the corresponding period of the year before.

“The overarching concern is the government foregoing cutting its expenses and sticking with debt instruments for running its operations,” she said.

For the record, debt securities in Iran have never experienced a default. But an analysis of the budget bill by Al-Monitor shows that the government is always forced to settle the past matured securities by issuing new ones. This means that the government’s commitments are accumulated and rolled over year after year.

The ratio of debt to GDP in the Iranian economy is more than 60%, while the gross financing needs to GDP stand at 30%, according to a recent parliamentary study. This means that the debt balance combined with the financing required to pay the current debt is high compared with the government’s financial capabilities.

Oil prices are far from their heyday levels, and healthcare costs and financial obligations of plans such as guaranteed wheat purchase are further straining government finances. Consequently, the government will either have to limit its financial needs, or risk trapping future governments in a chain of defaults.