Next Fiscal Year’s Budget Deficit Could Widen Fivefold

“As per the document of expenditures and revenues, the Budget Law should pursue goals such as balancing revenues and expenditures as well reducing the size of the government, delegation of affairs to the private sector and cooperatives, and reforming the banking system according to the Sixth Five-Year Development Plan (2017-22). But what is expected from the budget under the current circumstances is for it to pull the country out of recession and improve the economy,” Ebrahim Bahadorani was also quoted as saying by the news portal of TCCIM. 

“On the other hand, it must play a significant role in preventing smuggling and boosting non-oil exports. All in all, whatever that might help the economy thrive next year must be rooted in the budget.”  

Noting that the proposed budget for the fiscal 2021-22 has put the attainment of these goals and plans in doubt, Bahadorani said the total budget, including the budget of state companies and the operating budget, has increased from 20,180 trillion rials ($77.61 billion) for the fiscal 2020-21 to 24,360 trillion rials ($93.69 billion) for the fiscal 2021-22, indicating a 21% increase. 

“The general budget has, unjustifiably, risen by 43%. It is unjustifiable because a considerable portion of subsidies will be paid from off-budget funds. Meanwhile, current expenses have increased 46% compared with fiscal 2020-21, which is not reasonable within the space of a year,” he said. 

“The interesting point is that budgetary revenues, which have to meet these expenses, have increased by 10%. As a result, operating deficit, the difference between revenues and expenses, is estimated to hover around 3,190 trillion rials [$12.26 billion], i.e. five times as much the current year’s estimated figure.”

Budget Deficit

Referring to the point that 1,210 trillion rials ($4.65 billion) of the operating budget’s deficit is projected to be supplied from oil revenues and 1,980 trillion rials ($7.61 billion) from sales of companies, resources of the National Development Fund of Iran (the country’s sovereign wealth fund), and proceeds from sales of bonds, Bahadorani said these figures indicate that the next year’s budget is in contrast with goals stated above; it is in fact unbalanced.

“Next year’s inflation rate is expected to reach 30% but the development budget has increased by 18%. Consequently, the next year’s capital expenditure budget [when constant prices are used] is less than the current year’s budget. Notably, development budgets often don’t go far enough [around 55-60% of the projected finance is typically being delivered]. As a result, the development of infrastructures would face challenges next year,” he said. 

Latest data released by the Statistical Center of Iran show the average goods and services Consumer Price Index in the 12-month period ending Nov. 20, which marks the end of the eighth Iranian month, increased by 29% compared with the corresponding period of last year.

The official noted that oil exports have been estimated to stand at 1,990 trillion rials ($7.65 billion) next year, registering a 3.5-fold increase compared with the current year’s budget. He added that 700 trillion rials ($2.69 billion) will be gained from the sale of oil bonds to increase total oil revenues to 2,690 trillion rials ($10.34 billion). 

This is while, according to the head of Plan and Budget Organization, Mohammad Baqer Nobakht, only 16% of 480 trillion rials ($1.84 billion) of the current year’s projected oil revenues were realized. 

Given the global recession resulting from the outbreak of coronavirus, the rise in oil supply by the United States, Russia, Iraq and Saudi Arabia, uncertainty regarding sanctions and Iran’s blacklisting by the Financial Action Task Force—the global anti-money laundering watchdog, it seems highly unlikely that the government could obtain revenues from this source.

Export Concentration Index

Iran’s Export Concentration Index, which estimates a country’s reliance on a limited group of commodities as its primary source of foreign exchange income, stood at 0.43 in 2019, about six times bigger than that of Turkey and Poland. 

According to a report by ILNA, citing the Economic Analysis Center of Tehran Chamber of Commerce, Industries, Mines and Agriculture, the high concentration score must be a concern for economic planners as it suggests the country’s trade vulnerability to changes in global demand.

“A 27% increase has been envisioned for tax revenues next year. The government was supposed to take measures regarding tax evasion and expanding the tax base; such measures are nowhere to be seen in the budget bill. Total income from selling state companies has been predicated to stand at 950 trillion rials [$3.65 billion] whereas the privatization processes are being interrupted repeatedly and several governmental bodies throw a spanner into the works. It would be tough for the government to generate this income unless it works out a solution to tame their might,” Bahadorani said. 

Total tax earnings as per the fiscal 2021-22 budget bill have been set at 2,515 trillion rials ($9.67 billion), including 591 trillion rials ($2.27 billion) from tax on legal entities, 491 trillion rials ($1.88 billion) from income tax, 238 trillion rials ($915 million) from wealth tax, 235 trillion rials ($903 million) from tax on imports and 957 trillion rials ($3.68 billion) from tax on goods and services. 

“Despite legal requirements, the government has also failed to remove high-earners from the list of cash subsidy receivers. Likewise, the government has not found a way to rid itself of the controversial policy of allocation of cheap currency at the rate of 42,000 rials per US dollar to imports of essential goods in the next year’s budget bill. 

The government will pay 428 trillion rials ($1.64 billion) in cash and non-cash subsidies next year as per the next fiscal year’s budget bill (March 2021-22). On top of that, it will allocate 310 trillion rials ($1.19 billion) for the implementation of the so-called Livelihood Assistance Program, i.e. cash transfers as compensation for higher gasoline prices introduced in November, 2019. 

“If the current bill receives approval from the parliament and the Guardian Council [an oversight body that ensures laws are in line with the Iranian Constitution and Islamic law] budgetary dependency on oil revenues will rise to 32% from the current year’s 8%.

“What is expected from the budget law is to facilitate business environment, production and investment, and end inflationary recession. Revenues must be equal to expenditures in a balanced budget. But the next year’s budget bill is suffering from huge deficit per se and appears unlikely to help achieve these objectives,” Bahadorani concluded.