Note 5 of the budget bill says to implement monetary policy, control interest rates and curb inflation, the regulator can launch open market operations to trade Islamic bonds issued by the government and accept the same as collateral to lend to banks.
The bill emphasizes that the CBI is allowed to only trade Islamic bonds issued by the government in the secondary market and at prices floated therein.
The Majlis Research Center, an influential parliamentary think tank, earlier hailed the government decision to launch the OMO as “a critical necessity” to regulate CBI lending, Financial Tribune reported.
Launching the OMO and purchasing bonds by CBI will apparently increase demand for such bonds that will in turn reduce the yield of such bonds and bring them closer to interbank borrowing rates which the MRC says ultimately reduces borrowing cost, and thereby facilitates the borrowing process.
OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce the supply of money. Within OMO, the CBI buys government bonds to increase the money base (cash reserves), thereby reducing inter-banking lending rates. On the other hand, selling government bonds decreases the base money and raises interbank rates.
According to the parliamentary think tank, due to current religious jurisprudential prohibitions, except for treasury bills, the CBI is not legally allowed to trade in other types of Islamic bonds.
Swapping Debt
The MPs also outlined details about bartering government debt with various sectors by issuing treasury bills. Accordingly, the CBI is required to facilitate the swap of debt with banks, non-government banks and CBI.
The proposal in the budget bill notes that the government is obliged to repay its debt to legal and real entities (cooperatives and public sector) before the fiscal year is out in March by issuing a particular type of treasury bills to swap government debt with money public and private companies owe to the government.
The MPs also tasked the treasury with settling Islamic treasury bills and agreed that the settlement of treasury bills should be prioritized over other payments of the treasury.
The budget bill stipulates that the government can issue Islamic treasury bills with three-year maturity and sell them up to 130 trillion rials ($1 billion) to creditors.
Treasury bills will be issued with the sole purpose of settling government debt to creditors as determined by the Plan and Budget Organization.
On behalf of the government, the Ministry of Economy is tasked with issuing government bonds that will be backed by government assets.
Foreign Exchange Facilities
As per an amendment to Note 4 of the budget bill, the MPs agreed to base Nima (integrated forex deals system) rates for converting foreign exchange loans into rials.
Nima is the secondary forex market in which the rates are higher than the official rate (USD=42,000) mandated by the CBI and lower than the open market rates (USD=135,000).
Note 4 of the budget bill stipulates that agent banks are allowed to lend loans in foreign exchange to the private sector, cooperatives, and non-government public investors to complete upstream gas and oil projects and support supplemental and transformational industries related to sugar beet production and processing.
The loans are also directed at development and infrastructural projects in the mine and industrial sectors in which the private and cooperative sectors contribute a minimum 51% to projects with higher priority in less developed areas.
Repayment of loans should be forecast in the annual budget plans. The repayments should be deposited with the NDFI, and to the extent possible, should be made from earnings secured from the projects.
Lawmakers allowed the government to withdraw 15% of the total cost of railroad projects and water and electricity plans funded by foreign finance via the National Development Fund of Iran (sovereign wealth fund). As per the related law, the government should undertake 15% of the total cost of projects funded with foreign finance.
MPs agreed to municipalities spending at least 60% of their total earnings from bond sales to expand urban transportation and railroad projects and renovate old textures mainly around holy shrines.
The bill stipulates that guarantees for repayment of bonds for urban railroad and transportation projects will be the joint function of municipalities and the government (PBO).