Iranian regime president Ebrahim Raisi has stated that since his inauguration, the country’s budget deficit of 4,800 trillion rials (approximately $9.6 billion) has been resolved without printing money or borrowing from the central bank. However, the Majlis (parliament) Research Center has announced in its latest report on the government’s debt situation that the amount of these debts has grown by 61 percent in one year.
The Majlis Research Center‘s report explicitly states that the ratio of government and state-owned companies’ debts to gross domestic product (GDP) reached 30.6 percent at the end of autumn 2023.
This ratio is significant because the larger the gap between debt and GDP, the more severe the recession becomes, and the government resorts to printing money to compensate for its debts. The most significant consequence of printing unbacked banknotes is an increase in inflation rate, a method that the regime has used in various periods when facing budget deficits.
In addition, the government of Ebrahim Raisi has employed another method to compensate for the budget deficit: borrowing from surplus resources of state-owned companies.
An examination of the financial statements of state-owned companies shows that the majority of them are operating at a loss and not only do they not have surplus resources to lend to the government, but many of them are also at risk of bankruptcy.
A report published by the Ministry of Economy in June admits that government-owned companies and banks have a debt of 5,000 trillion rials (approximately $100 billion), of which one-third is related to the National Iranian Oil Company.
Hidden Debts
Domestic media outlets, including Tejarat News website, report that the reason for the increase in the debts of government companies to banks, especially within a year mentioned by Ebrahim Raisi, who claimed that no borrowing had taken place, is that government companies have acted as intermediaries between the government and the banking network. These companies have borrowed cash from banks and lent it to the government.
This process has also put banks under resource shortages, to the extent that the legal reserves of some banks have fallen below critical levels. The government’s borrowing from banks has led to increased withdrawals from their legal reserves and a significant increase in their debts to the central bank.
In July, the Central Bank announced in a report that the debt of specialized banks to the central bank reached 514 trillion rials (approximately $102,8 billion) in the past year, which is 10.7 percent higher than the previous year. At the same time, the Parliamentary Economic Commission stated that the government’s debt to banks during the mentioned period has grown by 62.4 percent to over 650 trillion rials (approximately $1.3 billion).
The government’s borrowing from banks and the pressure on them to cover the budget deficit has intensified the practice of “printing money” in Iran’s economy. The printing of money, measured by the base money index, has been accelerated in recent years due to government budget deficits.
The growth rate of the base money index in the past year has been reported as 42 percent. This means that although the government has not directly borrowed from the central bank, it has increased the debts of both banks to the central bank and its own indebtedness to the banks through intermediary transactions.
The result of such actions has pushed the inflation rate to around 70 percent at the end March.
The regime has a debt of approximately 30 quadrillion rials (approximately $60 billion). According to Rahim Mombeini, the Deputy of the Organization of Planning and Budget, “the total debt of the government to the banking system and organizations is about 11,440 trillion rials (approximately $22,88 billion), and the debt of government companies is about 18,940 trillion rials (approximately $37,88 billion). Additionally, the government’s debt to the National Development Fund is about 74 billion dollars.” These figures have grown by 61 percent in just one year, according to a report by the Parliamentary Research Center.
The Majlis Research Center, in a recently published report on the government’s debt situation, cites the reasons for the increase in these debts as “failure to pay annual commitments by the government to the Social Security Organization, underestimation of some expense items, and borrowing from the banking network for guaranteed purchase of wheat.”
In explaining the “underestimation of some expense items,” the report states that the debts of government companies are in foreign currency and increase as the rial continues to depreciate.
This government research institution also explicitly states in this report that the ratio of government and state-owned companies’ debts to gross domestic product (GDP) reached 28.8 percent at the end of 2022. At the same time, government debts resulting from the issuance of government bonds have also grew by 42 percent during the mentioned period.
Every day more than yesterday
To escape from increasing and larger debts, the regime has borrowed not only from banks but also from the resources of the National Development Fund. According to Mehdi Ghazanfari, the CEO of the National Development Fund, the government has withdrawn $100 billion out of $150 billion reserves of the National Development Fund so far.
About a month ago, the Majlis Research Center also stated in a report that the average withdrawal from the resources of the National Development Fund in the tenth government (Mahmoud Ahmadinejad’s second term) was $453 million per month, nearly $700 million per month during the eight years of Rouhani’s two terms, and an average of $12.1 billion per month in the thirteenth government (one and a half years).
Of the total $100 billion resources of the National Development Fund, $40 billion was given to government and private sector companies, which, according to Ghazanfari, are repaying them with difficulty.
Moreover, in the past five years, the government has resorted to issuing ‘Islamic bonds’ with a 23% interest rate to compensate for its budget deficits.
These bonds, considered as market debt, can temporarily serve as a means to cover budget deficits, but the increasing trend of bond issuance and creating financial burdens for future years complicates the government’s debt sustainability.
According to the Majlis Research Center’s report, the government has issued a total of 5,130 trillion rials (approximately $10.26 billion) in bonds from 2016 to the present. The highest amount of bond issuance was in 2020, amounting to 1,624 trillion rials (approximately $32.48 billion), the same year when the stock market experienced a historic crash in August.
While advanced economies use debt as a means to stimulate economic growth, in Iran, with the increase in debts, recession accompanied by inflation has made living conditions harder for people. As borrowing from the banking system increases, unbacked money is created, leading to increased inflation.
Moreover, the borrowed funds have been spent on current expenditures instead of being invested in production resulting in higher inflation figures.
It appears that this practice, which started during the presidency of Ebrahim Raisi, will continue in the coming years. According to Rahim Mombini, the Deputy of the Organization of Planning and Budget, the budget deficit for this year’s government is estimated at 794 trillion tomans. This increase in the budget deficit must be compensated either through increased taxes or borrowing from banks and the central bank, both of which will further burden the economy and the people, according to Mombini’s statements.
