New IMF Report Calls for Iran to Access International Bond Markets
A new report from the International Monetary Fund (IMF) examining “selected issues” in Iran’s economy, including the expansion of non-oil exports and the role of women in the labor force, places special emphasis on the importance for Iran to develop the government securities market, which is a priority under the Sixth National Development Plan (NDP).
The report, authored by an IMF team in cooperation with the Iran Parliament Research Center, establishes that the “deficit and gross funding needs of the [central government] are set to rise as securitization of arrears and financial sector reform advance.” Iran’s gross financing requirements will rise from the current level of 4.5 percent of GDP to 15 percent of GDP by the end of the decade.
Countries at a similar stage of development as Iran are able to fund public investment via bond offerings in international markets. However, Iran remains largely isolated from international financial channels. Acknowledging this, the authors of the IMF report suggest that “fast development of the government securities market would help overcome Iran’s limited access to international capital markets and lower its recourse to monetary financing of the budget.”
This suggestion echoes the analysis of a 2015 Bourse & Bazaar piece by Seyed Ahmad Araghchi, now vice governor of the Central Bank of Iran. In the piece, Araghchi argues that “securitization offers the best and most efficient methods of financing the country’s projects in the post-sanctions era in the shortest period of time.”
The IMF team praises Iran for establishing a Debt Management Office (DMO) within the Ministry of Economic Affairs and Finance to coordinate the issuance of government debt, including Sukuk bonds and Islamic Treasury Bills.
However, Iran has yet to develop a clear Debt Management Strategy (DMS) to give greater clarity and confidence to creditors. The authors note that “although the annual budget laws provide a ceiling for types of securities to be issued, there is no pre-announced issuance calendar, debt statistics are not published, and the objectives of debt management are not clearly defined nor publicly disclosed.” Moreover, the DMO is currently developing much of its policy in isolation, whereas it ought to craft strategy in discussion with CBI and the Planning and Budget Office (PBO) “to ensure greater coordination between monetary and fiscal policies.”
These reforms will also be important for expanding the diversity of creditors. Data from the Iran Fara Bourse shows that 80 percent of bonds are held by asset management companies, most of which are owned by banks. Just 10 percent of bonds are held by foreign owners, and the remaining 10 percent is held by individuals and corporates.
Tellingly, the IMF authors consider it a “long-term” prospect for Iranian bonds to be included in international bond indices. Certainly, the political uncertainty surrounding the Iran nuclear deal and the remaining barriers to reintegration to international financial markets will make this difficult if not impossible in the near term. These factors are not however discussed directly in the report.
Nonetheless, the authors suggest that Iranian bonds should be “traded on an international clearing house” and that the DMS should devise conditions where bond issuance is of a significant enough size and has enough primary dealers to ensure “liquidity and consistent bid/ask spreads” as well as transaction volume.
Overall, the IMF report offers a compelling example of the kind of technical dialogue Iran needs to ensure that its process of domestic financial reform meets internationals standards.