Avoiding Domestic Debt Default Is Imperative: PBO

EghtesadOnline: Head of the Plan and Budget Organization said the government’s income from selling debt has been used mainly to reimburse bonds sold in the past.

News ID: ۷۸۷۳۳۰

22 November 2021

In a note posted on Twitter, Masoud Mirkazemi said the Raisi administration has to pay 5,350 trillion rials ($19 billion) in principal amount plus interest on bonds that mature up until 2026.

“The new government is working to settle payments of previous bonds rather than generate income from bonds [for other needs],” he wrote.

Most of the debt was issued in the past three years when the former government was grappling with unprecedented budget deficits due to tough economic sanctions unleashed by former US president, Donald Trump, in 2018. The brutal coronavirus pandemic made a bad budgetary situation worse.

The economic blockade indeed drained government income from crude oil export, the lifeblood of the economy. The present administration is facing more or less a similar dilemma.

The government made 440 trillion rials ($1.57 billion) in bonds from May to Sept to plug the gaping holes in its budget.

Apart from selling bonds, the government generated 810 trillion rials ($2.8b) from treasury bills in the present fiscal year.

There are plans to sell bonds worth 500 trillion rials ($1.78b) by the time the current fiscal year is out in March 2022.

Most government earnings from the debt market was through the weekly bond auctions that started in May 2020 and banks and investment funds were obliged to earmark a significant portion of their funds to buy the bonds.

Last year, the government earned 1,257.4 trillion rials ($4.5b) from 42 bond auctions held by the Central Bank of Iran, according to data published on the bank's website.

While issuing bonds is hailed by many as the best “noninflationary” approach to pay government bills in the  sanctions-hit economy, many economists say that selling debt  should be a temporary solution and the government cannot, and should not, depend only on bond offers for long.

*** Reckless Spending

They rightly insist that governments have gotten used to “spending money they don’t have” and selling debt is tantamount to postponing governments’ unmet financial liabilities to the unknown future.

Instead of resorting to bonds, think tanks and independent observers have urged successive governments to find secure and sustainable sources of income.

Among other things, governments have been recommended to cut spending, exercise tighter control over the finances of state and government companies (many are in the red) and reform the old and obsolete budgeting procedures.

Reforming tax collection methods can also provide a sustainable source of income. Earlier the Majlis Research Center, an influential parliamentary think tank, said the “tax exemptions must be purposeful and conditional.”

For example, by improving the tax regime, the government can earn more by enforcing capital gains tax and integrating e-payment systems with tax portals to be able to better monitor all moneyed dealings.

As for cutting government spending, the MRC says it must avoid untenable rise in wages while state institutions and government-run companies must be obliged to cut wasteful spending.