Tuesday , 3 August 2021

Rouhani’s budget proposal reverses declining reliance on oil

Al-monitor – Iranian President Hassan Rouhani presented the last budget bill of his current term to the parliament Dec. 4. The state budget for the next Iranian year, beginning March 21, 2017, will exceed 10 quadrillion rials ($328 billion at an exchange rate of 33,000 rials to the dollar) for the first time in Iran’s history. It is 10.9% larger than the current year’s budget, but it looks to be more realistic as government revenue is projected to increase only by 1.5% while reliance on tax revenues will grow steadily.

Alireza Ramezani

Thanks to the lifting of nuclear-related sanctions Jan. 16 as part of the Joint Comprehensive Plan of Action, the Rouhani administration seems to have felt less pressure preparing the budget bill. Indeed, the figures released by the administration indicate that it has adopted neither a contractionary nor an expansionary fiscal policy for the coming year. The proposed budget forecasts 7.7% growth in gross domestic product (GDP) and expansion of the money supply by 19%, with an expected inflation rate of 7.6%, which is slightly less than the current level.

The prospect of increasing oil revenue, the gradual repatriation of unblocked state assets abroad and projected 12.3% growth in investment have given administration officials hope that they will be able to hit their established targets.

To refinance part of Iran’s hefty debt to contractors, the administration expects the parliament to let it issue 325 trillion rials ($9.8 billion) in bonds. The budget bill also calls for lawmakers’ approval to allow the administration to issue another 50 trillion rials ($1.5 billion) in Islamic treasury bills to pay off the bonds as they mature.

As government-backed bonds have proved to be popular on the Iranian debt market, officials are hopeful that they will hit their set targets in the coming year. Indeed, bonds offer at least 18% in annual interest, 3% higher than the bank deposit rate ceiling imposed by the central bank. Thus, it is no surprise that bonds have remained so popular in recent months.

Tax revenues are estimated to reach 1.6 quadrillion rials ($48.4 billion), up by 8.7% compared to the current year. Of note, employees who earn less than $5,454 a year will be exempted from income tax, according to the new budget. Given that 91% of projected tax revenues have been collected so far this year, the Tax Administration is confident that it will hit its targets next year.

The prospect of rising crude prices appears to also have given policymakers confidence to develop a budget more heavily reliant on oil. That petroleum exports will likely soon gain further momentum — thanks to the Nov. 30 agreement by the Organization of the Petroleum Exporting Countries (OPEC) exempting Iran from proposed production cuts — the administration is now considering oil exports as a more reliable source of revenue than taxation.

In the proposed budget, revenue from crude oil exports is expected to approach 1.11 quadrillion rials ($33.6 billion) — up from 745 trillion rials ($24.8 billion at the projected exchange rate in the current budget of 29,980 rials per dollar) — if the government can export 2.42 million barrels per day on average over the course of the next fiscal year at a projected average price of $55 per barrel. Thus, oil accounts for 34.6% of revenues in the proposed budget, up from 25.8% at present. The increasing reliance on oil has led critics to argue that the new budget will be a setback for the economy.

The table below summarizes the key positions of the proposed budget framework, compared with the budget law of the current year (ending March 20, 2017). Rials were converted to dollars using the exchange rates set in the respective budgets.

Sources: Donya-e Eqtesad and Fararu

Among other issues that could come under parliament’s microscope are controversial gasoline and diesel fuel price increases for consumers. Under the budget bill, the Petroleum Ministry would be allowed to add 5% to the price of gasoline in a bid to raise the funds needed to renovate and expand oil pipelines and refineries. Meanwhile, the cost of diesel for Iranian consumers is expected to increase by 20%. The latter, if ratified by lawmakers, would provide the administration with 920 billion rials ($27.8 million) in extra annual revenue, but could also lead to higher transportation costs for Iranian industry and businesses.​

Moreover, even pro-Rouhani lawmakers could criticize the bill for calling for a 5% increase in the import duty for passenger cars, a policy that would result in further gains for domestic carmakers, whose products have a reputation for poor quality.

The budget bill also calls for a 10% rise in state employee salaries, marking the first time in years that the administration has proposed an increase above the official inflation rate. The key selling point in this regard is a new effort by the administration to address public concerns about excessive pay for senior state officials, which was the focus of a major scandal earlier this year. The proposed budget calls for developing a mechanism to steadily monitor payments to state officials.

Under note 21 of the bill, the State Administration and Employment Organization will have one year to design and make operational an integrated online system in cooperation with the Economic Affairs and Finance Ministry and the Social Security Organization. The online system will help officials collect detailed pay data by job titles and ensure that the Supreme Audit Court and Management and Planning Organization will have permanent access to detailed payments made by state-run organizations, including municipalities and Astan Quds Razavi, one of Iran’s largest charitable organizations.