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:
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.
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.
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:
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 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.
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.
EPC | 12 Jan 2021
EPC | 11 Jan 2021