Iran’s Budget between Discrepancy in Official Figures and the Reality of Collapse

EPC | 17 May 2020

On 20 March 2020, Iranian President Hassan Rouhani announced the start of the implementation of the Iranian general budget for the current Iranian year (March 2020/March 2021). Thus, it became the first general budget in the history of the new Iranian regime to be implemented without being debated in Parliament. After the Iranian Parliament had rejected the draft general budget in January 2020, the Supreme Leader Ali Khamenei dropped the role of Parliament in debating the budget owing to the suspension of Parliament’s activity as a result of the spread of coronavirus. The Guardian Council of the Constitution was tasked with debating the general budget and presenting it to the government for implementation. As a result, on the last day of the last Iranian year, Rouhani informed the ministries of the draft general budget and of its effect.

Iranian general budget: basic figures and revenue

The budget of the Iranian public sector for the current year, which was proposed by the government in November 2019 for discussion in Parliament, is characterized by unique features. It stood at 484 trillion tomans, recording an increase of nearly 8 percent compared to last year’s original general budget and nearly 34 percent compared to the adjusted general budget. While members of Parliament that had formed a parliamentary committee to discuss the draft general budget rejected it owing to its overestimated expected revenue, the version that the government was mandated to implement after Khamenei’s decision stood at 561 trillion tomans (in addition to 79 trillion tomans from ministry revenue, making the total government budget stand at 640 trillion tomans), recording an increase of nearly 25.2 percent compared to the initial version of last year’s budget and an increase of nearly 52.4 percent compared to that budget’s adjusted version.

The adjusted version was characterized by a significant decrease in reliance on oil export revenue. While the revenue resulting from oil exports was 137 trillion tomans in last year’s draft general budget, the current year’s draft general budget foresees 45.5 trillion tomans from oil export revenue. While this amounts to a decrease of 66.7 percent in revenue, it also refers to a decrease in the revenue share as a result of oil exports in the whole budget from 24.3 percent to 8.1 percent. However, tracing the matter proves the opposite.

The current year’s general budget greatly relies on the principle of selling government assets to secure the budget’s resources. While this sector’s share in last year’s general budget was less than 0.5 percentage points, it accounts for nearly 16.2 percent of the current year’s general budget. This comes within the framework of reducing the government’s role in the Iranian economy and of searching for alternative resources to oil.

1. Basic figures:

After broad controversy, the current year’s general budget eventually demonstrated an increase of 25.2 percent compared to last year’s budget, to stand at 561 trillion tomans. While the positions of officials demonstrate that sanctions on the oil sector have driven them towards adopting a general budget that does not rely on oil revenue, the nature of the Iranian economy makes it impossible to separate the general budget from petrodollars. This makes the oil price adopted in the budget an essential price. In this context, Mohammad Bagher Nobakht, Vice President of Iran and Head of the Budget Organization, announced that the government has approved 50 dollars as the oil barrel price in the budget.

Government sources announced that the Rouhani government plans to export oil, gas and petroleum products worth 22.5 billion dollars next year (18.5 billion dollars in exports of oil and petroleum products and 4 billion dollars in exports of gas), so that the general budget’s share of this revenue would be nearly 14.7 billion dollars, while 4.5 billion dollars would be allocated to the National Savings Fund and nearly 3.25 billion dollars to the National Oil Company.

Unlike what it did in earlier versions of the general budget, the government has not adopted for the current year’s general budget a single official exchange rate for the dollar, but rather multiple rates, as follows:

  • For the dollars resulting from oil exports, the government approved 4,200 tomans per dollar as an official rate for the exchange of 10.5 billion dollars of oil revenue.
  • For the oil revenue surplus, the current version of the general budget has approved 8,500 tomans per dollar.
  • For other revenue and resources, such as the resources stemming from the Savings Fund and foreign investments, the general budget confirms the adoption of the market-adopted rates which provides it with greater manoeuvrability in closing the deficit resulting from the reduction in revenue.

2. Main sources of revenue

The general budget foresees that the revenue of the current year will reach 640 trillion tomans (nearly 561 trillion tomans in general revenue and nearly 79 trillion tomans in ministerial revenue). The main sources relied on by the budget to provide those amounts are taxes, oil revenue, sale of government assets, distribution of securities and bonds and the National Savings Fund.

  • Tax revenue constitutes the backbone of the general budget for the current year. The budget foresees the collection of nearly 195 trillion tomans in taxes, which accounts for nearly 30.5 percent of the general budget, recording an increase of 25 percent compared to the budget of the last Iranian year. The government plans to collect 175 trillion tomans in taxes, an increase of nearly 37.8 percent compared to last year. It also plans to collect 20 trillion tomans in customs duties, a decrease of nearly 23 percent compared to last year.
  • Oil revenue constitutes the second main pillar of the current year’s draft general budget. While the draft general budget confirms reliance on 45.5 trillion tomans  as revenue from the export of oil and petroleum products, accounting for 7.1 percent of the total general budget, this amount does not constitute all the oil relied upon by the budget. In addition to the revenue from oil exports, the draft budget relies on 90 trillion tomans in oil revenue resulting from bartering crude oil with contracting companies for budget projects. Therefore, the total oil revenue relied upon by the budget will be nearly 135.5 trillion tomans, which accounts for 24.2 percent of the total general budget.
  • Revenue from the sale of government assets will constitute the third main source for the general budget. The government counts on collecting a total of 103.5 trillion tomans from this sector, an increase of nearly 22.5 times compared to expected similar revenue in last year’s budget. At the detail level, the general budget plans to collect 50 trillion tomans in sales of government assets, while the Ministry of Economic Affairs is mandated to privatize 40 trillion tomans worth of its assets and capital in companies, institutions and infrastructure and to barter 12.5 trillion tomans worth of its property for its debts to security and pension establishments, so that this sector’s revenue would make up 17 percent of the budget.
  • Distribution of securities and bonds constitutes another source relied upon by the government in its budget for the current year. The general budget confirms the distribution of a total of 91.5 trillion tomans in such securities (71.5 trillion tomans in Islamic securities and 20 trillion tomans in Treasury bonds), so that this sector’s revenue would account for nearly 14.3 percent of the general budget with an increase of nearly 30.7 percent compared to last year.
  • National Savings Fund will constitute the last source within this list. The government plans to receive nearly 2.795 billion euros from this Fund during the current year’s budget. While the draft budget demonstrates that the government plans that the rial equivalent of this amount be 32 trillion tomans, the adoption of the official exchange rate for the euro could increase this amount to a maximum of 50 trillion tomans, making this sector’s share in the total general budget range between 5 percent and 7.8 percent.

3. Main expenses

The government’s main expenses under the current year’s draft general budget are distributed among several fields, taking into account that some of those fields overlap, such as the overlap between salaries and health and education sector costs.

  • Salaries: the salaries sector is the most important within public sector expenses. Accordingly, public sector salaries constitute nearly 21.2 percent of the total general budget at 136 trillion tomans, which represents an increase of nearly 21 trillion tomans compared to last year. Pensions and pension fund share of 87 trillion tomans constitute 13.6 percent of the total general budget. Both fields constitute nearly 34.8 percent of the total general budget at 223 trillion tomans.
  • Education: the education sector constitutes 14.2 percent of the general budget’s total expenses at 91 trillion tomans, an increase of 14.5 percent compared to last year. While the education sector constitutes 84 trillion tomans, the higher education sector constitutes 7 trillion tomans.
  • Health: the health sector constitutes 13.3 percent of the total general budget at 85.2 trillion tomans, most of which is from the general budget revenue, in addition to revenue from the government programme to rationalize energy. The health sector budget has increased by nearly 14.1 percent compared to last year.
  • Urbanization sector: the draft general budget shows that the government has allocated nearly 70 trillion tomans to this sector to account for nearly 11 percent of the total budget. The greater portion of the sector relies on oil revenue and government company expenditure in this field.
  • Defence sector: while the budget indicates that the defence sector budget stands at 70.4 trillion tomans, without a clear change compared to last year, a study of the general budget axes show that the military and security sectors account for 172 trillion tomans of the general budget revenue, accounting for nearly 26.9 percent of the total budget.

Expected deficit in the general budget and government options to close it

1. Expected deficit:

While the deficit resulting from the fall in oil and tax revenue has led to adjusting the general budget by nearly 18 percent, a close look into the five resources relied upon by the government indicates an initial deficit ranging between 82.5 trillion and 64.5 trillion tomans as a result of the difference between total revenue (between 557 trillion and 575 trillion tomans) and the general budget amount (640 trillion tomans). However, this is not all the expected deficit:

  • In terms of oil revenue, specialists underline that the government has relied on overoptimistic revenue in this respect. While it is difficult to obtain an accurate size of the estimated exports in this sector, a clear narrative of the figures approved by the government in this sector could provide figures close to the state aspired to by the government. According to the calculations, the government expects to export 70 trillion tomans worth of oil (of which the budget’s share is 45.5 trillion tomans, while the remaining amount goes to the Savings Fund and the National Oil Company). This entails the export of 723 thousand barrels per day (at 50 dollars per barrel and a rate of 5,300 tomans to price petrodollars). However, all figures appear to be overoptimistic based on the expected oil prices for the current year (expected by experts at 30 dollars) and Iranian export rate (expected by experts at 250 thousand barrels per day).
  • In addition, reliance by the budget on the revenue of 90 trillion tomans in oil sale on the stock market or bartering it for internal debts indicates that the government plans to sell nearly an additional 550 thousand barrels of oil (based on the market prices of 15,000 tomans per barrel), which are overoptimistic figures. Experience shows the failure of 29 out of 30 attempts carried out last year to offer oil on the stock market (70 thousand barrels were sold out of 21 million barrels offered). Accordingly, the deficit stemming from this sector could be expected to range between 70 trillion tomans (based on an optimistic view) and 100 trillion tomans (based on a pessimistic view).
  • In terms of tax revenue, specialists warn that the figures on which the budget was based cannot be materialised. Last year’s experience has shown that the government could collect a total of 120-130 trillion tomans of the expected taxes (which stood at 153 trillion tomans in the budget), amounting to a minimum deficit of 23 trillion tomans. Upon considering the impact of accumulated crises such as the fall in oil prices and the impact of the coronavirus spread, the expected deficit in this domain would be higher. Figures released by research centres indicate that the expected deficit in this sector will range between 25 trillion and 50 trillion tomans.
  • The current year’s budget relies on providing more than 100 trillion tomans through selling government assets and capital or bartering them for debts. This does not seem possible in light of the failed government experience in selling assets so far. While last year’s budget relied on 2 trillion tomans from the sale of government assets and corporations, total sales over the year did not exceed 264 billion tomans although the assets were put out to tender. This is attributable to several reasons, including lack of transparency and unprofitability of companies. Sales are not expected to be at this low level during the current year as the government relies on bartering the greater portion of them for its debts to government-linked institutions (including pension funds). However, according to the most optimistic expectations, 40 percent of this sector’s resources will not materialise, which amounts to a deficit of nearly 41 trillion tomans.

The deficit could extend to other areas of general budget resources, although this remains a weak possibility, limiting the deficit to those three resources in addition to the initial deficit. Accordingly, the deficit in the general budget for the upcoming year (initial deficit + oil revenue deficit + tax deficit + asset sale deficit) will be nearly 200 trillion tomans (31.3 percent of the total budget) according to the best expectations. According to the worst expectations, the deficit will reach 273 trillion tomans (42.7 percent of the total budget). This is associated with several criteria, including the global oil prices, Iran’s capability to export more oil under the sanctions, and the continued impact of the coronavirus.

2. Means of countering the deficit

The Iranian government has multiple options to close parts of the potential deficit in the general budget, some of which are suggested in the general budget text, while others are resorted to by the government under such conditions based on experience:

  • In terms of revenue stemming from oil exports, the budget suggests that the government resort to the share of the National Savings Fund in case there is a deficit in oil revenue. This amounts to adding nearly 30 percent to the total government revenue, although as far as revenue from bartering oil is concerned, this method would be futile. The government could resort to pricing petrodollar based on market prices to overcome a part of the deficit in oil revenue. However, this would lead to multiplied inflation as a result of the increase in the prices of commodities that the government seeks to secure with the subsidized dollar.
  • The government can count on the resources of the National Savings Fund and the Sovereign Development Fund in closing parts of its deficit. Last year’s experience has shown that the government has allocated nearly 27.5 trillion tomans from the revenue stemming from the sovereign fund resources during the general budget adjustment process. While some experiences show the opposition of the Supreme Leader to relying on the resources of those funds and borrowing from them (a case in point is his opposition to borrowing one billion dollars from the Fund to support the health sector in countering the coronavirus crisis), the government is expected to be able to borrow 2 billion dollars, in addition to 2.795 billion euros counted on by the current budget.
  • The last source that the government can rely on to close its budget’s deficit is foreign investments, as the budget provides for reliance on 50 billion tomans only of these. While the sanctions imposed on Iran have placed strong obstacles in terms of foreign investments, Iran managed to attract 800 million dollars of these during last year. More investments could be perceived from Iran’s traditional allies (China and Russia) in sovereign projects. Iran could also be perceived to obtain portions of the IMF loan to support its economy.

General conclusions

In view of the circumstances experienced by the Iranian economy under the sanctions, the circumstances experienced by the global economy in light of the collapse of oil prices, and the spread of coronavirus, the Iranian government should submit an austerity budget and seek to cut public spending and taxes to encourage the productive sector. However, the figures of the general budget approved by the Expediency Discernment Council of the System reveal an increase by 25.2 percent compared to last year’s budget amidst clear opposition by the government (which had proposed an increase by nearly 15.6 percent) and Parliament (which has been neutralized in debating the general budget by order of the Supreme Leader).

This tendency to increase the budget, despite all the economic problems faced by the government, can be justified by the existence of a green light from Khamenei’s House of Leadership allowing the use of the resources of the National Savings Fund in closing the expected budget deficit in an attempt by the regime to counter the social resentment as a result of economic contraction. However, the Supreme Leader’s rejection of the government’s demands to use the Fund’s resources to support the health sector in countering the coronavirus demonstrates that the green light is extremely limited and that the government will have to make an arduous journey to obtain any amounts from this Fund.

Consequently, the figures on which the budget (both the government-proposed version and the final approved version) was based appear to be difficult to materialize under the circumstances and based on previous experience. This demonstrates that the budget was a dead letter that is not meant to be actually implemented. Similar to last year’s budget that had to be adjusted and decreased in mid-year by the government based on factual circumstances, the general budget is expected to be adjusted midway, unless an important turning point is reached during the year, such as the suspension of sanctions or obtaining assistance or loans from international quarters or from Iran’s partners.

Scenarios

First scenario: success by the government in closing the expected deficit in the current general budget through the collection of full expected revenue: this scenario assumes that the government can close the budget deficit or significant portions of it based on the materialization of the expected revenue. The scenario assumes that international circumstances will permit the Iranian regime to sell more oil. It also assumes that oil prices will rise to a reasonable level (45 dollars according to some estimates). This would help Iran collect more oil revenue. The scenario assumes that the government can collect a significant portion of the taxes under the legal mechanisms it is trying to develop. It also assumes that the government can offset a portion of the deficit resulting from failure to sell assets through raising the level of securities and bonds and deferring debts to upcoming years. It can be noticed that this government-contemplated scenario is too optimistic to materialize. However, a portion of it could still materialize which would amount to a decrease in the general budget deficit.

Second scenario: closing a portion of the expected deficit in the general budget through oil revenue and international assistance: this scenario assumes that the government can close a significant portion of the general budget deficit through reliance on oil revenue that the scenario assumes will yield a surplus for the above-mentioned reasons and through international assistance in the form of grants and investment from the international community and from Iran’s strategic partners. While obtaining an IMF grant is difficult in light of the IMF conditions and opposition by conservatives at home, tracing the official steps reveals attempts to obtain grants, loans and investments from China (mainly) and Russia. Yet despite the importance of those attempts, they face tough obstacle, including placing Iran on the blacklist of the Financial Action Task Force (FATF).

Third scenario: failure by the government to close the deficit and the resort to re-drafting the budget: this scenario assumes the repetition of last year’s experience, albeit in a worse form. The fall in oil revenue and the non-materialization of tax revenue and of revenue stemming from the sale of government assets would lead midway to adjusting the general budget through an austerity programme that would reduce public spending (by at least 30 percent) by reducing spending on the urbanization sector, pension funds and the health sector and reducing monetary subsidies (thus providing nearly 120 trillion tomans), raising taxes (by raising value-added taxes and taxes on bank account profits etc., thus raising government revenue by nearly 50 trillion tomans) and reliance on the National Savings Fund resources. However, this likely scenario faces several obstacles or shortcomings, mainly the economic recession as a result of the coronavirus spread and increased public spending as a result of the epidemic.

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