In the first Central Bank of Iran auction of Islamic bonds on Tuesday, the government generated 51 trillion rials ($300 million).

The move to open a primary interbank market for bond auctions is a CBI initiative to help the government raise funds for budgetary needs as it struggles with rising deficits.

As per an earlier announcement, the government put on offer Murabeha bonds worth 100 trillion rials ($588 million) and asked banks to put in their bids via the interbank trading platform.

As per the auction rules, bids are 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.

According to a CBI report covering details of Tuesday’s auction, nine banks and 22 non-bank financial entities put in bids worth 209.4 trillion rials and 55.9 trillion rials, respectively.

The Economy Ministry agreed to process only 51 trillion rials in orders from the highest bidders.

The government bonds mature in 2023 at 15% interest payable every six months. The bonds are to be sold on a gradual basis in regular weekly auctions, according to a CBI notice posted on its website.

The CBI says it will hold the second phase of the auction on June 9, calling on banks, non-bank credit institutions, investment funds, insurance firms and investment companies to take part.

Banks and non-bank credit institutions can place orders and orders from other financial institutions should be registered at the Tehran Stock Exchange trading platform.

The government expects to make 1,000 trillion rials ($5.8 billion) from bonds as per provisions of the current fiscal budget (March 2020-21).

Apart from the amount allowed by the budget law, the government plans to secure approval for an additional 1,500 trillion rials from the High Economic Coordination Council — an ad hoc economic decision-making body comprising the heads of the three branches of power — to fix the gaping budget hole.

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 the bonds.

In addition to banks and investment funds, government bodies,  such as the Social Security Organization, the largest pension fund, and contractors of development projects are expected to  be the main buyers of government bonds.


CBI Stance

In an interview with ISNA on Thursday, the CBI Governor Abdolnasser Hemmati said holding bond auction is “a first step to correct budget financing methods”.

Defending the move, he said, “This will certainly not only help in compensating budget deficits, it will also help improve the   balance sheets of banks.”

The senior banker is of the opinion that by selling bonds the government will not need to print money, a commonly used practice in the past for deficit spending but highly prone to push up inflation rates.

“The CBI doesn’t intervene in bond auction at the primary market but will step in the secondary market to control interbank interest rates using open market operations to reach the desired inflation target,” he has been quoted as saying.

Last month the CBI set an inflation target at 22% for the current fiscal year that ends in March 2021 and said it will use multiple policy instruments to implement “inflation targeting”.

It merits mention that present regulations do not allow the CBI to buy bonds in the primary offering and act only as the regulator and operator of the market. It can, however, engage in bond transactions on secondary markets and control interest rates using the OMO and other monetary policies.

In a meeting with President Hassan Rouhani on Friday, Hemmati said “the interest rate of treasury bonds has dropped below 15% for the first time in recent years”, linking it to the implementation of OMO and other CBI measures, the government news portal reported.

Within the OMO framework, central banks buy and sell bonds to expand or reduce money supply.  The mechanism will also allows central banks to buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  Selling government bonds reduces the base money and raises interbank rates.

In addition, the OMO enables banks to hold bonds as collateral to borrow from the CBI.