Iranian Government Wrong to Tackle Deficit by Issuing Bonds, Economist Says

President Hassan Rouhani’s cabinet has announced a plan to issue government bonds to finance the country’s budget deficit for 2019-20 fiscal year. Many economists, however, fear that the plan will only increase the government’s debts. The move is in response to sharp drops in Iran’s oil and non-oil exports caused by the stringent U.S. economic sanctions which went into effect in May and November 2018.

Fardin Aghabozorgi, the former managing director of Ayandeh Bank Brokerage Company, is one of the many critics of the government plan. He warns that issuing bonds would create massive problems for Iran’s Central Bank and the country’s monetary policy. 

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“The government’s proposed 2019-20 budget will reduce funding for the National Development Fund of Iran (NDFI) [which supplements oil and gas revenue] by 12 percent. The proposed cut violates the Law on the Sixth Five-Year Plan (2016-21) [approved by the Majlis (Iranian Parliament) in March 2017,]” Mr. Aghabozorgi said in an interview with the Tasnim news agency. “Increased debts and lack of investment will have short- and long-term consequences for Iran’s economy.” 

“More than 75 percent of the public funds in the 2019-20 budget bill [$112 billion] will go towards salaries and wages, which is unacceptable. Close to 40 percent of this year’s Expenditure Budget will pay government pensions, which will add to the overall debt,” Aghabozorgi explained. “The government has been using bonds [sukuk (Islamic bonds) and treasury bills] for the past few years to finance the budget deficit. The measure, however, increases the national debt exponentially.” 

The current deficit is about 10 percent of gross domestic product — GDP — or 60 percent of the state’s general budget, excluding oil revenues. Mr. Rouhani’s cabinet plans to issue $120 million government bonds in 2019-20. It will also have to repay close to $80 million for debts maturing in the same year.

Aghabozorgi warned: “Given the enormous deficit in the budget, the government’s plan to enter debt markets will have dire consequences for the economy. The government cannot cover its rising liabilities in the coming years. Issuing bonds has become the government’s preferred method of balancing the budget in recent years. The practice has, however, damaged the country’s monetary policy and created serious problems for the investment market.”

“One of the main problems with issuing funds is that it allows the government to borrow heavily from public funds which belong to future generations. According to the Law on Sixth Five-Year (2016-21), the government must reduce its expenditure, but the 2019-20 budget has called for a $95 salary increase for government employees. The move will raise the inflation rate.”

The government issues a bond with a promise of repayment on its maturity date. Bonds are low-risk investments and meant primarily to raise funds for government expenditures and cover deficits in the annual budget. 

Iran’s GDP growth in 2017-18 slowed to 3.8 percent. The latest World Bank projections show Iran’s GDP contracting by 3.6 percent in 2019.

Under the current depressed economic atmosphere, any revenue generated from government-issued bonds is unlikely to be invested in the economy. The budget deficit, U.S. sanctions, and ineffective financial policies have brought the country’s economy to the brink of complete collapse.

 [Translated from Persian by Fardine Hamidi]