Development Projects: Iranian Budget Underdog

EghtesadOnline: Budget deficit is taking its toll on Iran’s infrastructure development, leading to under-investment and worsening recession in industries.

News ID: ۷۳۹۷۹۴

13 February 2017

Figures published by the Central Bank of Iran show the budget earmarked for the development sector has never been fully allocated in the past few years, as the government failed to materialize the revenues it predicted.

“The main reason for the government’s failure in providing resources for development is that it fails to achieve its target revenues,” Mohammad Taqi Fayyazi, the head of Budget Team at Majlis Research Center, told the Persian weekly Tejarat-e Farda.

“Only 1.44 quadrillion rials ($37.4 billion) of the 1.96 quadrillion rials ($50.9 billion) in projected revenues were materialized in the eight months of the current Iranian year (March 20-November 20),” he said, stressing that logically, spending should keep pace with revenues.

According to Financial Tribune, the government was supposed to earmark 387 trillion rials ($10 billion) to development projects in the eight-month period, whereas only 39% of this amount have been injected in these projects.

This, in fact, has been the case during the past three years, as the government only met 58%, 68% and 39% of its projected development spending during March 2015-16, March 2014-15 and March 2013-14 respectively.

“Resources are allocated based on priorities. And the priorities include salaries and wages of state employees and buying back issued bonds and paying their interests … What little remains goes to development projects,” Fayyazi said.

A 10.85 quadrillion-rial ($280.6 billion) budget bill was proposed by President Hassan Rouhani early December.

Government companies, banks and profit organizations will get 7.56 quadrillion rials ($195.5 billion) to finance their operations, up from 6.83 quadrillion rials ($176.6 billion) last year.

The government owns the majority stake in Iran’s economy, bringing about low productivity and high costs. More than two-thirds of the revenues projected for next year are extended for the expenses of ministries and their affiliated companies and organizations. And the administration is unable to reduce most of this.

“Every budget bill has fixed and flexible parts,” Fayyazi said. “A smaller and more agile government means the inevitable section of the budget, including salaries and costs, is small and the flexible part is larger.”

In the next year’s budget bill, 511 trillion rials ($13.2 billion) are associated with the revenues of ministries and state institutions while 3.2 quadrillion rials ($82.7 billion) are placed under “public resources”, which include government expenditures. The two categories combined have seen a 10.6% rise compared to the current year’s budget.

The government recorded 430 trillion rials ($11 billion) in budget deficit for the first half of the current Iranian year. The gap between revenues and spending is expected to widen this year, compared to $13 billion in all of last fiscal year.

The government has projected a stronger US dollar and a higher price for crude oil in the March 2017-18 budget bill. It set the greenback’s exchange rate at 33,000 rials, up from last year’s 29,970 rials, and still far lower than the 38,490-rial/dollar in Tehran’s markets on Sunday.

OPEC’s third largest crude oil exporter is assuming an average oil price of $50 a barrel, up from the $40 used in the current year’s budget. Iran and other oil-producing countries recently agreed to limit production to drive up prices.

Taxes are projected to rise 1,130 trillion rials, up from last year’s 1,010 trillion rials. And with the $50 crude and 33,000-rial rate for the US dollar, the administration expects 1,100 trillion rials from oil exports, including the export of natural gas and condensates.

Oil prices fell drastically in 2014, from over $100 per barrel to below $30 record low in 2016, squeezing Iran’s hydrocarbon-dependent revenues. The Islamic Republic had enjoyed sky-high crude prices for a few years, adjusting its spending with abundant revenues. But this became a challenge when prices nosedived.

Fayyazi said Iran’s budget faced problems following the reduction in oil price and shrinking crude exports as a result of sanctions (imposed over Iran’s nuclear program).

“This is while lowering the costs at that point was impossible. The only way out was to cut the resources allotted to the infrastructure sector,” he said.

Development spending in the next budget, which is estimated at 620 trillion rials ($15.5 billion), is 9% more compared to the current year’s budget, which is highly unlikely to be realized by the end of the year.

Low infrastructure spending compounds the lingering recession in Iran’s construction sector. For years, steel, cement and other construction industries have suffered a prolonged slowdown resulting from a drop in demand.

“Some 75% of Iran’s development budget are associated with construction,” Fayyazi said. “If the development resources are allocated, the construction sector will thrive.”

The lawmaker noted that due to limited cash, the government has failed to pay its liabilities to contractors whose influence on the economy has been shrinking in the past few years.

The total value of overdue payments to contractors by ministries, including the Ministry of Energy, has been unofficially estimated at up to $35 billion.

The parliament has approved the repayment of 400 trillion rials (more than $10 billion) of government debt in the current fiscal year (March 2016-17).

Most of the debt is due to a large number of unfinished infrastructure projects, the completion of which requires $40 billion. Almost half of the next year’s development budget ($7.5 billion) will be used to complete 2,700 unfinished projects.