Bourse and Bazaar | Navid Kalhor: President Rouhani’s budget proposal for the upcoming Iranian year will see the government run a deficit amounting to about 10 percent of GDP or 60 percent of the state’s general budget, excluding oil revenues and withdrawals from the National Development Fund.
Rather than increase tax collection to ease budget gaps, the Rouhani administration plans to tap Iran’s nascent debt markets to cover its public spending requirements. Rouhani’s cabinet intends to issue at least IRR 5 trillion government treasury bills and sukuk bonds in the next Iranian calendar year. For debts already nearing their maturity, it will have to repay close to IRR 3.3 trillion in 2019-20. The recourse to debt markets has economic commentators increasingly concerned over state’s ability to cover rising liabilities in the coming years.
The concern extends to the think tank of the Iranian parliament. Their assessment is that over the next four to five years Iran’s government debt may reach 50-70 percent of GDP, leaving little “fiscal space.” According to the Sixth Development Plan (2016-21), the government is required to keep government debt, including the debt of state-owned enterprises, at below 40 percent of GDP. But it looks likely that the government will exceed this level. Should Iran’s government debt exceed 70 percent of GDP, the fiscal position would be high-risk. Meanwhile, by 2021, interest changes on bonds will constitute 4 percent of GDP, while the total budget deficit is meant to remain below 3 percent of GDP according to parliamentary researchers.
Looking worldwide, high government debt is associated with financial crises. According to data from the OECD, two third of countries hit by the 2009 financial crises were those whose government debt-to-GDP ratio exceeded 60 percent.
When looking to the fraction of the total debt ratio, it is important to consider both the numerator and the denominator. The fact that government bonds in Iran offer 20 percent returns means that interest payments can quickly balloon. Unlike Japan or the United States where interest rates on government bonds are zero percent and 2.4 percent respectively, keeping tabs on fiscal space in Iran requires accounting for the cost of the debt to the government, not merely the amount of debt issued. ‘
Moreover, given that Iran has experienced limited economic growth in recent years and is poised to enter a recession, its fiscal space is expected to decrease. According to the study conducted by The Center for the Management of Debt and Financial Assets of Iran, this proportion was approximately 55.6 percent in 2015.
Putting aside the risks posed by the Rouhani governments turn to debt markets, it is worth asking whether there have been any clear macroeconomic benefits. In the assessment of parliament researchers, the Rouhani administration’s turn to debt markets is only sensible if increased government spending helps generate economic growth.
But with government revenues expected to stagnate, it is unlikely that Rouhani will have sufficient means to encourage the infrastructure projects and other investments to keep Iran’s economic growth at the 2.5 percent level experienced in the first six months of this Iranian year—particularly given the reimposition of US secondary sanctions.
Low or negative growth rates combined with the high interest rates of debt securities mean that the government’s insatiable appetite to underwrite its budget through bond markets may backfire, forcing the Central Bank of Iran to print more money to pay debts, exacerbating the cycle of inflation and devaluation to the detriment of the whole economy. To avoid such an outcome, the Rouhani government must match its turn to debt markets with an effort to expand the tax base.