Iran: Bigger Role for Stock Market in Gov’t Funding

EghtesadOnline: The government has concocted a bigger role for the stock market on the revenue side of the next fiscal budget (March 20-21), according to the CEO of Iran Fara Bourse, the junior stock market.

News ID: ۷۴۹۲۰۴

18 December 2019

Taking stock of projections in the budget bill, Amir Hamouni pointed to 1,240.7 trillion rials (9.5 billion) in revenue the government expects by selling its financial assets.

The figure represents 27% of the total revenue of 4,840.5 trillion rials ($37 billion) seen in the budget, up from the 13% in the budget of the current fiscal year, IRNA reported.

Hamouni links the bigger figure to the gradually evolving change in the government’s approach to the debt market, according to Financial Tribune.

A financial asset is a non-physical asset whose value derives from a contractual claim, such as bank deposits, bonds, and stocks.

Financial assets are usually more liquid than other tangible assets, such as commodities or real estate, and can be traded on financial markets.

As per the provisions of Note 5 of the budget bill, the government plans to offer 200 trillion rials in treasury bills to settle its debts to contractors. This is 53% higher than the amount in the current budget.

Also state-companies are allowed to issue bonds up to 65 trillion rials for completing projects that are “economically, technically and environmentally viable”.

The bill also allows government to issue 550 trillion rials worth of Islamic bonds to meet its spending needs. Municipalities can also issue bonds worth 50 trillion rials.

Another 100 trillion rials in bonds will be offered to repay the principal and interest on bonds that mature next year. In addition,  the oil and industries ministries are allowed to jointly issue bonds worth 35 trillion rials for funding development projects.

Special Focus

To be able to meet its ever-growing expenses by issuing the huge volume of bonds, the government needs to tap the bond market. For this reason it is paying special attention to two financial instruments in the budget, namely fixed income funds and exchange-traded funds

As per the budget bill, fixed income funds are obliged to allocate at least half of their resources to purchase Islamic bonds issued by the government.

This obligation, however, has drawn criticism on the grounds that it will limit the freedom of the funds and is incompatible with privatization norms.

According to Hamouni, the legal and technical aspects of the decision need to be scrutinized as it directly relates to the people’s assets.

Fixed income funds are funds that invest largely or exclusively in interest-bearing bonds. Bonds make regular interest payments and are committed to redemption of the invested amount on maturity date.

Divestiture Plan

In the same vein, the government has mentioned in the draft budget its intention to divest its stake in state-owned companies via ETF.

As per the draft, companies and organizations are obliged to name subsidiaries in which the government’s share is below 50%.

They are required to also send the names of the companies to the Ministry of Economy and Plan and Budget Organization by June 2020.

Note 2 of the bill stipulates that the government divest its assets in the form of ETFs, albeit after ascertaining the eligibility of the applicants.

An ETF can own hundreds or thousands of stocks across various industries, or can be isolated to one particular industry or sector.

The government has plans to divest its remaining shares in 18 companies.  President Hassan Rouhani submitted the budget bill for the upcoming Iranian year to the parliament last week.