Iran's Foreign Debt Drops to $10.03 Billion

EghtesadOnline: According to central bank data, Iran’s foreign debt was $10.03 billion by the end of first nine months of the current fiscal on December 21.

News ID: ۷۴۶۶۸۲

13 February 2019

The Central Bank of Iran website reported that long and medium-term debt accounted for over two-third of the foreign debt at $6.8 billion by the end of third quarter. Short-term debt amounted to $3.1 billion during the period or 31% of the total foreign debt.

This is while the total external debt by the end of the first month of the current fiscal (April 20) was $11.3 billion, meaning that Iran's debt registered over 12% reduction since then.

The ratio of Iran’s external debt to GDP is projected at 2.5 for 2019-20 by the World Bank, which is comparatively lower than many countries. A comparison between Iran’s foreign debt and those of developed countries shows the former’s financial commitment is rather insignificant and among the lowest in the world, according to Financial Tribune.

In its latest forecast about Iran’s economy, the World Bank said the country’s foreign debt would drop to $9.3 billion by the end of current fiscal in March 2019. However, the global lender predicted that the Iran’s foreign debt would rise in the next fiscal to $10.1 billion. The WB’s forecast for Iranian foreign debt for previous fiscal was $10.1 billion.

Mirror of Strength

Most analysts believe that the reduced volume of foreign debt is not benign for economic prosperity because the amount of foreign debt also reflects the strength of a nation’s economic ties with foreign lenders and international monetary institutions. Likewise, low external debt may also represent a country’s inability to borrow from the international market.

As such, long-term loans to a country indicate the lenders’ confidence in the financial power and ability of the borrowing country. This may partly explain why less developed and poor countries have less foreign debt;  banks are unwilling to take risks by lending to dysfunctional economies.

However, foreign funding helps only if it is used to develop infrastructure and pay for manufacturing projects, experts say.

Attracting foreign investment for Iran has become harder after the US pulled out from the nuclear deal last November and re-imposed its “toughest ever” sanctions on key economic and banking sectors.

Iran had planned to attract $30 billion in foreign investment soon after signing the Joint Comprehensive Plan of Action. It succeeded to secure only $1.5-$2 billion dollars as many banks and key industrial players walked away fearing US penalties.

Top Borrowers

According to Global Finance, a magazine, the United States, as the world’s largest economy, was also the world’s largest debtor to foreign creditors in 2017. The country owed $18.3 trillion to foreign lenders in the previous year followed by the euro area with $14.2 trillion and the United Kingdom with $7.4 trillion.

According to the Plan and Budget Organization, Iran attracted $5.02 billion in direct foreign finance in the previous fiscal (March 2017-18). This was half the amount approved by lawmakers.

Approved direct foreign finance in the previous fiscal was $10.6 billion which increased over $7.1 billion a year before.

As per the provisions in the next fiscal (2018-19) budget bill, the government can secure foreign finance up to  $30 billion.

Private sector projects, cooperatives, knowledge-based companies and non-government institutions can apply for foreign funds after putting up the required collateral with agent banks.

The government is allowed to allocate a minimum of $2 billion in foreign finance, sourced from the total foreign finances mentioned in the bill, for urban railroad projects to mitigate air pollution on the condition that municipalities pay 15% of the share of the project and guarantee the repayment of loans.

As per regulations, the Ministry of Economic Affairs and Finance, the PBO and CBI are the main institutions that can solicit foreign loans.