Iranian Government’s Plan for Economic Recovery: Chances of Success and Likely Consequences

EPC | 01 Sep 2020

In its final year, the government of Iranian President Hassan Rouhani suffers from accumulated crises, including the US sanctions that have continued for more than two years, the decision of the International Financial Action Task Force (FATF) to blacklist Iran, as well as the repercussions of the spread of the coronavirus, and the other influences in terms of political disputes and economic corruption. Despite those crises, in the first week of August 2020, government sources spoke of a comprehensive scheme, describing it as an economic breakthrough that would have a positive impact on public life and activate stalled development projects. Subsequently, Iranian Parliament Speaker Mohammad Bagher Ghalibaf underlined that the coming days would witness a positive development at the economic level. However, soon afterwards, that plan collapsed, or at least was postponed. Regardless of the chances of success or failure of this scheme, it is accompanied with signs indicating the likelihood of important political developments in Iran in the near future.

Background of government promises

Figures indicate that the Rouhani government is in an unstable economic situation in light of an expected budget deficit of 33 percent of its volume, according to the Research Centre of the Iranian Parliament, and between 1.5 million and 3.5 million lost jobs in the spring, in addition to a liquidity crisis that makes the government's capabilities to support urban projects and continue to provide monetary support, even to pay salaries, at stake, in addition to the political and social tensions which reflected in high crime rates and an increase in the level of labour protests, amid the expected return of popular protests to the street.

The Iranian government tried to stick to several programmes in order to reduce spending on the one hand, and on the other obtain new resources to close the deficit and cover public spending, including withdrawing some sectors from inclusion in the government-subsidized dollar, selling the government dollar stock in free markets (instead of selling it at the price approved in the budget), reliance on the stock market in selling government assets, and reliance on taxes resulting from transactions in the stock market, as well as the distribution of securities and financial instruments to provide to the government a total of between 60,000 and 70,000 billion tomans so far, according to independent sources. While this amount is remarkable, it cannot cover the size of the expected deficit that was exacerbated by decisions to support the economy in the face of the repercussions of the spread of coronavirus.

The repercussions of the entirety of those effects were manifested in expectations of negative growth exceeding 7 percent according to the expectations of official study centres, a monthly inflation rate at historically highest levels (inflation of nearly 6.9 percent, which is the second highest monthly inflation rate in four decades), and record rates of high liquidity (the increase rate reached nearly 7.3 percent in the spring). All previous government plans have failed to close the deficit and cut public spending.

While the Iranian government has not yet officially announced the details of this comprehensive scheme, research centres and informed sources have indicated the features of this scheme. It became clear that, if successful, the scheme would not aim at directly affecting daily life (despite its important repercussions in this regard) as much as it aims at helping the government overcome its crisis and help the Iranian regime show resilience for an additional period in the face of pressures.

Features of the Iranian scheme to sell oil on the local stock exchange

Projections indicate that the government’s new project plans to sell 220 million barrels of oil on the Iranian stock market within one year. This means selling 600,000 barrels of oil per day to the citizens. The scheme, which resembles the distribution of bonds and the sale of oil-backed securities as a guarantee of their timely collection, underlines that the government would sell the oil to citizens at the daily price of Iranian oil on world markets, provided that the applicable price for the exchange of the dollar in this sale would be the current price, which is largely close to the market price. The government guarantees that the amount would be paid after two years of transactions according to the daily oil price and the current price for the exchange of the dollar at the same date, which could guarantee to buyers additional profits in the event of an increase in the price of Iranian oil on the global markets and an increase in the current price of the currency. The government underlines that this would constitute a great temptation for investment, especially that the government asserts that in the event of a decline in oil prices or in the current price, the government guarantees the purchase of the securities at the purchase price plus a profit rate equivalent to the maximum annual bank profits (nearly 18 percent).

Thus, customers would be involved in a process of buying securities that guarantees them profits of at least 36 percent within two years, even in the event of a decline in dollar prices (a process that has been unprecedented over the past four decades). In case the current prices are adopted for Iranian oil (nearly 40 dollars) and for the dollar exchange according to the current price (nearly 22,000 tomans per dollar), the process would collect for the government liquidity amounting to 193,000 billion tomans within 12 months, and nearly 112,500 billion tomans during the remaining seven months of the current Iranian year.

Implications of the scheme and potential obstacles

Pursuant to the applicable laws, the government cannot launch its new scheme to support the public budget without the approval of the Iranian Parliament and the Supreme Leader. However, assuming that the government succeeds in passing it, the scheme would have an impact on the economic sphere in Iran, mainly as follows:

1. Closing the public budget deficit: if successful, one of the most important repercussions of this new project is that it would secure 112,000 billion tomans, which would be sufficient to close a large portion of the budget deficit. However, it would not close the deficit completely. While the Ministry of Economy in Rouhani's government itself asserts that the deficit would amount to nearly 140,000 billion tomans, parliamentary sources underline that the size of the deficit jumped to 242,000 billion tomans after the spread of the coronavirus compared to previous expectations which indicated that it would be at 185,000 billion tomans. This means that even if it materializes, the new scheme would not be capable of fully closing the deficit.

2. Lowering inflation rate: other government projects to close the deficit were based on several axes (including selling its dollar stock at market prices to reap the maximum surplus profits, raising the minimum taxes on goods, borrowing from banks, and cutting public spending). These projects serve to increase inflation by increasing the liquidity ratio, raising the costs of daily life, and reducing subsidies. Conversely, the new project would have an opposite effect, as it would serve to absorb the liquidity in addition to the government’s clear abandonment of the high dollar prices, which would have an impact on lowering the inflation rate.

3. Activating urban projects: the government announced that it would be obliged to cut spending on urban and infrastructure projects as a result of reduced revenues (especially oil revenues, which the budget confirms would be the source of funding for those projects). The new government project would secure new resources to activate this area, which is what was emphasized by Iranian President Hassan Rouhani.

4. Enabling the government to continue subsidy programmes: the Iranian government provides two packages of cash subsidies every month, in addition to other subsidy programmes (with an annual total of 100 billion dollars according to the draft general budget), and in allocating larger amounts of the subsidized dollar to secure basic goods (in light of the government’s abandonment of selling its dollar stock on the free markets to close the deficit.) The government has been suffering from many problems that almost prevented it from continuing with the social support programmes that have become important in light of the spread of the coronavirus. However, the new programme, if successful, would provide the government with new resources to continue those programmes.

By being able to continue to provide support to different groups and striving to reduce the rate of inflation, control the waves of high prices, and activate infrastructure projects, the government hopes to absorb the discontent of the street and reduce social unrest, whose undesirable repercussions are warned against by experts, in addition to striving to increase its popularity which has declined to record levels due to several economic influences and setbacks.

However, this scheme generally faces several obstacles that prevent its implementation, the most important of which are the following:

  • Opposition to the scheme by Parliamentary symbols. While the government seeks to circumvent Parliament by approving its project in the Council of the Heads of the Three Authorities, which is tasked by Khamenei with taking sovereign decisions to face the sanctions, parliamentary sources confirmed that prominent figures in Parliament are opposed to the project because of the fact that Parliament is being ignored and that the project would have implications for future governments. If a confrontation erupts between the government and Parliament over the issue, resolving the dispute would require the direct intervention of the Supreme Leader, especially considering that the project is opposed by influential names within the conservative current. The possibility that Parliament would oppose the government’s project becomes even greater considering a plan that is prepared by Parliament to reconsider the fuel rationing and rationalisation in favour of a project to support poor families within the framework of a comprehensive parliamentary programme to combat poverty and improve living conditions in the country.
  • The shaken confidence of the Iranian street in the project and the possibility that it would not respond to it. While the stock market experience, which is in its booming days, shows the possibility of a response to the project, the call by Ahmadinejad’s government on people to open dollar savings accounts and then failing them at maturity dates, and the sale by the Rouhani government of gold and then imposing taxes on those transactions, both constitute experiences that could prevent popular support for the project. The demand for the project would naturally depend on global oil prices. If prices tend to decline, this would have a negative impact on the popular response to the project. In view of the past failed experiences in supplying oil on the stock market, experts refer to the government’s reliance on achieving half the estimated amount at best.
  • If approved, the project could spare the government major damages, including the risk of collapse in its last year. However, the project would impose serious financial burdens on the next government as part of the strategy of the debt crisis deferral to the coming years. In this context, reference should be made to the government’s intention to distribute securities close to 90,000 billion tomans, in addition to pledges worth at least 262.5 thousand billion tomans as a result of the new project. Thus, the volume of debts owed by the next government would be nearly 352,000 billion tomans, equivalent to 63 percent of the total budget for the current year. When added to the government's decision to swap its debts for some sectors (including 50,000 billion tomans for the Khatam al-Anbyia (Last Prophet) Organization) for crude oil within a plan that may be similar to the new project, the next government would be the heir to a large volume of urgent debts.

Conclusions

  • Despite the government propaganda through which the new scheme is being promoted as a project that ends the difficult living conditions that the Iranian street is going through, the details of the project confirm that its real purpose is to overcome the size of the deficit in the public budget and try to show resilience in the face of sanctions for a longer period.
  • Resorting to this scheme in itself shows the Iranian government’s inability to find alternative ways to overcome the problem of deficit in the public budget, despite the trial of several measures, including using the stock market to sell assets and raising taxes.
  • Despite the supposed feasibility of the scheme in enabling the Iranian government to withstand sanctions, the scheme, if approved, would impose significant burdens on the next government by referring the crisis to it. Accordingly, and in light of the conservative current’s conviction that it would form the next government, the scheme is expected to receive strong opposition from this trend, both in Parliament and at the level of conservatives outside it. Along with other obstacles, this opposition is likely to obstruct the government’s proposed plan. At best, analysts anticipate the possibility of partial rather than complete realization of the scheme revenue, which would amount to the government’s failure in a new attempt to overcome the budget deficit.
  • The project carries within it striking signs of possible developments in the near future. The project confirms that the amounts would be collected within two years. It implicitly underlines the existence of an important turning point that would enable the government to obtain an amount of money that would enable it to fulfill its obligations towards investors. All this may mean that the Iranian regime is heading towards launching a comprehensive dialogue with the international community, enabling Iran to release its financial resources and sell oil in quantities sufficient to fulfill its obligations. This means the possibility of an agreement (albeit in principle) between Iran and the international community. On the other hand, it may mean the implementation of the strategic cooperation agreement between Iran and China, which is being discussed these days by the government and revolutionary institutions. Through this agreement, Iran could sell enough oil to fulfill its obligations.

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