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Alarming Rise In Government Debt Puts Iran's Economy At More Risk

Years of mismanagement, populist policies, corruption and sanctions have led to a huge government debt to banks in Iran.

According to the latest figures the debt has reached 284 trillion tumans by early July this year. Compared to the debt figure in late March, the government's debts have had a 9.7% rise within only four months.

The total amount is roughly $68 billion based on the current lowest official exchange rate.

Based on the Iranian Central Bank's report, the annual rise in the Rouhani administration's debts to the banks has been an alarming 22.4 percent.

Why government's debt to banks is important?

It can be significant for the economy in two ways. It shrinks the banks' resources and decreases the banks' ability to provide financing for various economic sectors. In this way, the amount of money people, businesses and industries can borrow from the banks will become gradually smaller, which in turn will hurt the economy.

On the other hand, a rise in the banks' debts could indicate that the government has used the banks to borrow cash from the Central Bank in order to cope with endemic budget deficits and meet its financial requirements through the powerful resources of the central bank.

This, in turn, inevitably leads to a rise in liquidity and the rate of inflation, because the central bank resorts to printing money.

Where do the debts come from?

Borrowing money from banks to make up for budget deficits is only one of the ways that leads to a rise in the government's debt to the banks. There are also other reasons for the government debt accumulation.

Part of the government's debts come from the bonds it has sold to the people and has guaranteed to repay an interest on top of the original sums it has borrowed.

For instance, former President Mahmoud Ahmadinejad's administration issued bonds known as "partnership papers" to fund its controversial Mehr Housing Project. Repayment of the face value and the interest on these bonds on due dates creates more debts for the government.

Meanwhile, the government and its subsidiary companies have guaranteed loans that in case of their non-payment or delay in their repayment, the amounts will be added to the government's debts to the banks.

Some 32 trillion tuman of the 284 trillion in question is to cover the loans guaranteed by government companies and over 251 trillion is what the government has directly borrowed in cash.

But why the government does not repay its debts?

President Hassan Rouhani has repeatedly spoken about repaying the government's debts to the banks. Nevertheless, the government's debts have been constantly on the rise since 2005.

After his election as Iran's President in 2013, Rouhani stressed that the government needs to repay its debts to the banks in order to put an end to the banking system's problems. But debts to the banks kept rising year after year during his presidency.

The reason of the government's failure in repaying its debts include revenue shortfalls (e.g. sanctions), lack of discipline in financial affairs and inappropriate planning.

Which president is to blame?

During Ahmadinejad's presidency (2005-2013), the government's debt to the banking system rose by 386% and nearly quadrupled by reaching to over 91 trillion tuman.

Rouhani started his presidency with over 110,000 trillion of debts to banks. The latest figures released by the Central bank show a rise of more than two and half times in the government's debts within the first five years of Rouhani's presidency.

Part of Rouhani’s presidency coincides with the removal of international sanctions and unrestricted oil exports, which should have helped government finances, but it did not. Here is where Iran’s extraterritorial adventures, mismanagement and corruption could have played a role.

Regardless of the differences between the political orientation of the Rouhani and Ahmadinejad administrations, compared to the figure for the year 2005, the Iranian government's debts have grown 12-fold in about 13 years.