Annual budget for upcoming year has been drafted to parliament on December 2017 and as a reference for country’s annual planning, it is of utmost importance which its revenues in case of amount and type and place of consumption can have significant effects on country’s economic trend. General information about Iran’s budget was discussed in Iran’s budget structure for the upcoming fiscal year 2018-19 and Iran’s budget bill in 2018-19 articles however, in this article, we want to address one of the most important parts of Iran’s budget about financing by issuing securities.
In current year’s budget, affiliates and subsidiaries of different ministries and also universities and science parks are allowed to issue Islamic Financial Securities up to 70 trillion Rials which shows 30 percent decrease in comparison to the previous year. Note that in last year’s budget it is expressly mentioned that bonds must be issued in respect to issuing Mosharekat bonds’ act but in upcoming year budget, Islamic Financial Securities are used. In other words, the government has the authority to issue different types of bonds and there isn’t any necessity to issue Sukuk or Mosharakat. These bonds are used in order to implement plans with technical, economic and financial feasibility.
In another clause in the budget, the government is allowed to issue Rial-based and foreign exchange-based Islamic Financial Securities up to 260 trillion Rials with 30 percent increase compared to last year. It is mentioned that unsold securities can be transferred to contractors, consultants and suppliers of equipment of that plans up to outstanding claim’s amount.
The next clause is about municipals. They have the authority to issue Islamic Financial Securities up to 80 trillion Rials. Note that at least 50% of securities referred to this clause will be dedicated to urban train projects. 50% of repayment guarantee for these projects is the government`s responsibility and the rest are municipals` obligation.
The government can issue tax-exempt treasury bills with maturity of one to three years and transfer to creditors up to 95 trillion Rials. The government is also allowed to issue 100 trillion treasury bills and settle them before the end of year. These bills are also tax-exempt and settlement of them is prior to all payments of treasury.
The government is allowed to issue 50 trillion Rials Islamic Financial Securities in order to repay principal and interest of bonds which will be matured in 2018. In last year, these bonds are scheduled to be issued with maturity up to five years but for upcoming year the maturity hasn’t been determined.
The Ministry of Petroleum and Ministry of Industry, Mine and Trade have been allowed to issue Rial-based and foreign exchange-based Islamic Financial Securities in order to invest in oil and gas projects with priority of shared fields (for Ministry of Petroleum) and infrastructure development projects (for Ministry of Industry, Mine and Trade) up to 50 trillion Rials. Principal and interest repayment are guaranteed by production increase of the very fields and proceeds of that projects.
Ministry of Petroleum has been allowed to use Islamic Financial Securities in order to repay principal and interest of matured Rial-based and foreign exchange-based Securities, banking facilities, matured collaterals and repayment of matured debts to contractors of upstream oil and gas projects up to 3 billion Dollars.
Issuing securities, treasury bills or Mosharekat bonds means that the government borrows from the public and this policy, not only won’t have inflationary effects in short-term but also guide wandering liquidity in community to go towards investment opportunities. Expansion of debt market leads to development in the capital market and also strengthen instruments of monetary policies.
All in all, financing by issuing securities is a policy in order to steer liquidity towards production and avoiding speculation. If this action is done well and completely, decreasing budget’s dependency on oil is conceivable but note that due to primacy of treasury bills’ settlement and considering them as risk-free securities, the government should try to meet predicted revenues and expected return on the government’s schemes because it has significant effect on country’s financial balance.