EghtesadOnline: The Central Bank of Iran will hold its first auction of government bonds on Tuesday. It has asked banks to place buy orders for the Murabeha bonds on the interbank trading platform.
Bonds are worth 100 trillion rials ($588 million) and mature in 2023 at 15% payable every six months. The bonds are to be sold on a gradual basis in regular weekly auctions, according to a notice published on the CBI website.
Plans to open a primary interbank market for bond auctions are aimed at helping the government raise funds for budgetary needs as it struggles with high and rising deficits.
Earlier the CBI had announced that it plans to hold auctions at the start of each trading week and on a regular basis.
Orders will be processed by the CBI’s brokerage arm and will be sent to the Economy Ministry for approval. The brokerage firm should settle the payment in one working day.
As per the 2020-21 budget, the CBI cannot trade in Islamic bonds issued by the government in the primary market. This means “it cannot participate in auctions of government bonds”.
“The CBI can only trade in bonds in the secondary market,” the regulator said.
It said the initiative aims to boost government finances, reduce trading costs in the interbank market and facilitate access of banks and credit institutions to bonds.
Raising funds through the debt market is seen as critical for the government saddled with deep budget holes that have become bigger due to the coronavirus, collapsing oil prices, US sanctions and loss of oil export revenue.
The government expects to make 1,090 trillion rials ($6.4 billion) from bonds as per provisions of the current fiscal budget. This is up 70% compared to the 640 trillion rials that was envisaged in the last fiscal budget.
Burden of Banks
It has been reported that the government intends to issue bonds worth 1500 trillion rials ($8.8 billion) over and above what is allowed in the budget to compensate for the for the ever-increasing deficit spending, according to the semi-official Fars News Agency.
It is highly unlikely that the government can find buyers for the bonds in bulk, and banks and fixed-income funds will have to bear the brunt as they are obliged to purchase a big portion of bonds.
Apart from banks, government creditors, such as the Social Security Organization, the largest pension fund, and contractors of development projects will be the main buyers of government bonds.
In a post on his Instagram account on Friday, the CBI Governor Abdolnasser Hemmati backed the bond plan and commended the government’s policy to promote the bond market by issuing bonds as “a right policy” that would also help the CBI curb liquidity growth.
In an earlier note, Hemmati said “Issuing and selling bonds will help the government avoid printing money”.
In his view, “It will not only assist the government meet its [budgetary] needs, but also help expand the debt market, fix balance sheets of banks and control inflation.”
Keeping the CBI money printing presses up and running during runaway inflation does not spur economic growth, rather it emerges as one of the main factors contributing to the ballooning liquidity.