Central Bank of Iran to Hold Bond Auctions

EghtesadOnline: The Central Bank of Iran said it plans to open a primary interbank market for auctioning bonds to help the government raise funds for budgetary needs.

News ID: ۷۵۰۰۳۴

14 May 2020

In a notice on the CBI website, the regulator said it aims to hold the auction at the start of each trading week and on a regular basis.

Lenders should place buy orders for government bonds through a special interbank trading platform. Orders will be processed by the CBI brokerage and sent to the Economy Ministry for selection.  The brokerage firm will settle the payment in one working day.

The CBI says the initiative aims to boost government finances, reduce trading costs in the interbank market and facilitate access of banks and credit institutions to the bonds.

Pointing to provisions in the 2020-21 budget, the CBI said rules prohibit the bank from trading Islamic bonds issued by the government in the primary market. This means “it cannot participate in the auction to buy government bonds”.

“The CBI is only allowed to trade bonds in the secondary market,” the regulator said, referring to budget law.

It seems the CBI will appear as a broker in this market and “will not be accountable for the volume of the traded bonds and rates”.

CBI brokerage will be in charge of developing the trading infrastructure and holding auctions.

Raising funds through the debt market is seen pivotal for the government struggling to plug its budget holes that have become deeper due to the coronavirus and collapsing oil prices.

The Rouhani administration is struggling with a chronic budget deficit due to United States sanctions that have hurt foreign trade and hit key economic sectors, namely oil, banking and shipping.

Appropriate Policy

“Issuing bonds will help the government avoid printing money,” he wrote in his social media account.

It will not only assist the government meet its [budgetary] needs, but also help expand the debt market, fix balance sheets of banks and control inflation, he added.

In the current fiscal budget the government expects to make 1,090 trillion rials ($6.5 billion) from bonds. This amount is up 70% compared to the 640 trillion rials that was envisaged in the last budget.

Apart from numbers seen in the budget, there is unofficial news that the government has received a nod from the High Council of Economic Coordination to issue 1500 trillion rials ($9 billion) worth of bonds, beyond the amount envisaged in the budget, to compensate for the ever-widening budget gaps, Fars News Agency reported.

The council is an ad-hoc body comprising heads of three branches of power to fast-track macroeconomic decisions.

Fars said the council approved the decision in its May 13 meeting, allowing the government to sell bonds in both the debt and stock markets.

Citing research centers and economic experts, the news agency reported Wednesday that the government is saddled with a 1500-trillion-rial budget deficit.

The influential parliamentary think tank, the Majlis Research Center, has often chastised the government for its overreliance on bonds for deficit spending.

Concerned about a similar borrowing pattern in the future, the MRC said “it will only postpone a problem that will get bigger in time.”

Going a step further, the MRC said, “This in fact is (tantamount) to replacing addiction to oil with addiction to borrowing.”

Like in the past, the think tank singled out for special criticism Iran’s overdependence on oil exports that for decades has been a bane of the economy.