Bond Auctions Resilient

EghtesadOnline: The Central Bank of Iran said the initiative to hold bond auctions has been positive so far in that it is helping the government fund its deficit spending without the need to expand the monetary base by overborrowing from the CBI.

News ID: ۷۵۰۴۵۵

18 July 2020

In a press release on its website, the CBI said the government has so far raised 360 trillion rials ($1.5 billion) from selling bonds to banks and non-bank financial institutions in seven bond auctions.

Pointing to the merits of financing the budget via the debt market, the CBI said “the government will fund its budget via existing resources in the interbank market and avoid the CBI to get ‘high powered money’”.

High-powered money or powerful money is another name for the monetary base. It refers to the total amount of bank notes and coins circulating in the economy, including those in public hands plus currency that is physically held in vaults of commercial banks and lenders’ reserves with the central bank.

The CBI said it helped the government to partially plug its budget holes via the framework of open market operation.

To fulfill this goal, the CBI has asked banks to allocate a portion of their assets to bond sales. “In light of the fact that in the new framework [OMO], the CBI manages liquidity of banks and non-bank credit institutions by issuing Islamic bonds… they need to allocate a portion of their assets to [buy] bonds.”

In the OMO framework central banks buy and sell bonds to expand or reduce money supply. OMOs allow governments to issue bonds to be used later by banks as collateral to borrow from the CBI.

The CBI has launched a series of bond auctions since May to raise funds for government spending amid the deep decline in revenues and omnipresent budget deficits. The bank hosts the auctions every Tuesday.

Lesser Evil

Economists say funding budget deficits via the bond market is a lesser evil than the government borrowing from the central bank. Overborrowing also means printing more money, running the risk of increasing the monetary base and galloping inflation.

The monetary base increased 8.8% by the end of the first quarter of the current fiscal year on June 21 to reach 3,834.7 trillion rials ($16.6 billion).

Last week reports said the government needs to sell at least 50 trillion rials in bonds every week to avoid overloading the monetary base.

In the last auction on Tuesday, the government sold Murabaha bonds worth 79 trillion rials ($343 million) marking the highest bond sale ever since the auctions started.

Economy Minister Farhad Dejpasand said earlier that “the government may not be able to realize 1,400 trillion rials ($6 billion) of its revenue projected in the March 2020-21 budget.” Tehran’s government expects to make 1,000 trillion rials ($4.3 billion) from bond sales as stipulated in the national budget.

Apart from the amount permitted in the budget, the government also wants to secure approval for an additional 1,500 trillion rials from the High Economic Coordination Council -- an ad hoc economic decision-making body comprising the heads of the three branches of power -- to fix the gaping budget hole.