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Iran turns to bonds to solve budget crisis

Tehran has chosen to issue domestic bonds to address its expected budget deficit, a policy that promises to have complex impacts on Iran's economy.

A man walks past the Central Bank of Iran in Tehran, Iran August 1, 2019. Nazanin Tabatabaee/WANA (West Asia News Agency) via REUTERS ATTENTION EDITORS - THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY - RC15076CC350

The Iranian government opted in mid May to issue domestic bonds to fill the enormous budget deficit that is expected in the current year. The plan is to sell a total of 2,400 trillion rials in new bonds (equal to about $13.5 billion at the free market rate). Incidentally, the current state budget already included the issuance of 900 trillion rials in domestic bonds and the government plans to secure the approval for an additional 1,500 trillion from the Economic Coordination Council — i.e. the heads of the three branches of power — to use the same tool to fill the expected budget deficit. Yet what the overall impact will this policy have on the country’s economy?

The first criticism of this approach is that the government’s calculations are based on the volume of the anticipated budget deficit and not on whether the economy can absorb this size of bonds. In fact, the total volume of domestic bonds that the government has issued in the past decades is less than the figure for the current Iranian year. To put the government plans in perspective, it should be noted that the above figure would equal 10% of the economy’s liquidity at the end of the past Iranian year, March 19. This volume of government debt within one fiscal year is unprecedented, but it is needed in light of the current financial bottlenecks caused by sanctions, low oil prices and the COVID-19 economic downturn

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