As Iran Oil Revenues Rise, So Does Spending

EghtesadOnline: The latest data released by the Central Bank of Iran show that as oil revenues jumped in the first quarter of the current fiscal year (March 21-June 21), higher spending and lower tax revenues have widened the budget deficit.

News ID: ۷۴۳۲۹۸

15 August 2017

Overall, the government earned 236.4 trillion rials ($6.2 billion) in revenues during the period under review, up 9.6% year-on-year, according to the CBI report published on its website.

The report added that 53% of the projected revenues for the three-month period have been realized.

Spending stood at 548.8 trillion rials ($14.4 billion) in Q1, up 48.8% over the first quarter of a year before. The figure is 85% of the expenditure predicted by the government in the budget for the period under review, according to Financial Tribune.

Revenues associated with the sales of oil, gas condensates and petrochemicals reached 188.9 trillion rials ($4.9 billion)—65% of what the government had expected to earn.

Hydrocarbon-related revenues went up 333.2% year-on-year, thanks to ramped up oil production following the removal of nuclear sanctions against Iran in January 2016, as part of a nuclear deal the country signed with world powers in 2015.

Government data show Iran’s crude oil production reached 3.8 million barrels per day by the end of the last fiscal year from around 3 million bpd in the previous year.

Under sanctions, crude output fell to 2.5 million barrels daily and exports were limited to just above 1 million bpd to a few customers in Asia.

Iran is allowed to pump an average of 3.8 million bpd by March 2018 under an OPEC deal aimed at eroding global inventories and lifting crude prices.

On average, Iran exported 400,000 barrels daily, or 64 million liters per day, of oil byproducts to buyers in the Middle and Far East in the fiscal 2016-17, up from around 220,000 bpd in the previous fiscal year.

Outbound shipments of oil byproducts are expected to rise by 200,000 barrels a day to 600,000 barrels daily in the current fiscal year, according to a report by the National Iranian Oil Products Distribution Company.

> Tax Revenues Drop

Tax revenues amounted to 181.9 trillion rials ($4.8 billion), indicating a 1.6% drop YOY, according to the report.

The government of President Hassan Rouhani has been trying to increase tax revenues to reduce oil reliance, which made the government financially vulnerable when it became subject to the nuclear sanctions. This is while the decline in crude prices during Rouhani's tenure put additional strain on government finances.

Lack of a comprehensive economic database, widespread tax exemptions and ambiguous regulations, along with a general failure to uphold the law, have long lowered tax revenues in Iran.

About 60% of Iran’s economy do not pay tax, including 40% that are exempt from tax and 20% that evade tax payment. Tax evasion is estimated at 300 trillion rials ($7.7 billion) annually.

The surprising drop in Q1 tax revenues comes after last year’s promising growth in tax earnings.

Iran collected 1.015 quadrillion rials ($26.6 billion) of taxes during the last Iranian fiscal year (March 2016-17), posting a rise of 28.1% YOY.

> Development Spending Cut Despite YOY Rise

Development spending is where the government is making huge cuts. A mere 8.2 trillion rials ($215 million) were allocated to development projects during the first quarter.

Although this shows a considerable 489% YOY rise, the figure is negligible compared to the 181.8 trillion rials ($4.8 billion) the government projected spending as per the budget law.

The widening deficit is taking a toll on the country's underdeveloped infrastructures.

The CBI figures indicate 421 trillion rials ($11 billion) were earmarked for infrastructure development last year, accounting for 73% of the amount projected in last year’s budget law.

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

> Alarming Deficit

Budget deficit during the three months stood at 174.7 trillion rials ($4.6 billion), showing an 8.9% rise compared with the similar period of a year before.

Deficit has been increasing sharply during the past five years. The deficit for the last fiscal year amounted to $7.62 billion, according to CBI. The figure stood at $5 billion in the fiscal 2015-16 and $3.4 billion in the year before.

The widening budget deficit, resulting mostly from fundamental budgetary issues, has raised concerns that bigger financial problems will face the administration that is already grappling with serious challenges in terms of financial resources.

Iranian economist Hamid Azarmand said “volatility” and “lack of balance” in the budget are on a “worrisome trajectory”.

To cover the widening deficit, the government has been issuing bonds. Iran sold $16.5 billion worth of bonds last year, indicating a 185.5% rise YOY. The government spent $8.9 billion to buy back the bonds sold before.

The Q1 data show 184.4 trillion rials ($4.8 billion) worth of bonds were issued in the three-month period alone, showing an 11.7% rise compared with the similar period of a year before.

“Selling bonds in such a huge proportion is unprecedented,” Azarmand says.

Even though the massive bond issuance can resolve the government’s financial problems temporarily, he said, due to this policy, the administration will face problems regarding payback of the interest on the bonds and the purchase of those previously sold. This will generate “accumulated debt”, which will influence the CBI resources, creating bigger long-term challenges.