Leader Calls for Undertaking Structural Reforms in Budget

EghtesadOnline: The government-proposed budget bill for the next fiscal year (March 2019-20) has been sent back to the Plan and Budget Organization to undergo structural reforms on the orders of Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei.

News ID: ۷۴۶۳۵۳

19 December 2018

“A decline in government spending according to the law of the country, upholding the principles of 'Resistance Economy' and reducing the economy’s reliance on oil revenues are what the Leader has called for when revising the budget bill,” Parliament Speaker Ali Larijani said on Monday.

The concept of "Resistance Economy", first proposed by the Leader, is to reinforce and shield the domestic economy from external shocks, and promote domestic production and self-sufficiency.

“With sanctions placed on the country, addressing the immediate urgencies including public employees’ salaries and employment should take center stage in drawing up the budget. The Leader believes that operating expenses need to be cut and instead the country’s budget should be channeled into improving economic growth and investment,” Financial Tribune quoted him as saying.

A key part of US sanctions against Iran focuses on the oil sector, which supplies a substantial percentage of the budget’s revenues and restrictions on crude sales.

The government had set the public budget at 4,330 trillion rials ($42.87 billion) in its early version but, according to a report by the Persian daily Donya-e-Eqtesad, the budget ceiling of its revised version has been cut to 4,070 trillion rials ($40.29 billion) now.

From the overall oil sales, the law says, the government is obliged to pay 14% to the National Iranian Oil Company and 34% to the National Development Fund of Iran.

NDFI, which is independent of the government, was founded in 2011 as Iran's sovereign wealth fund. The goal was to help save money when government earnings are high, especially from oil and gas exports. The fund lends to both public and private firms in need, especially during low oil prices.

Three Options

In the first draft of the budget bill, the government had cut to zero the 34% share of NDFI from oil sales to meet its expenditure in the face of dwindling revenues from oil sales as a result of US sanctions.

As per the reforms proposed by the Leader, the government is only allowed to use up only 14% of NDFI’s share and the remaining 20%, which is estimated at 260 trillion rials ($2.54 billion), must be paid to the fund.

To tackle this deficit, the government has three options: it should look for 260 trillion rials in new resources for the fiscal 2019-20, cut its spending or employ a policy that includes finding new resources and eliminating unnecessary expenses.

Given the financial challenges currently facing the country, the ability to create new resources seem highly unlikely therefore, as Larijani said on Monday, the best option for the government would be to cut back on its spending.

“Around 9,000 trillion rials ($89.10 billion) are spent on energy subsidies and the question is: Have we achieved optimal energy consumption? Reports show energy consumption in Iran is multiple times more than European countries,” the parliament speaker said.

"Weaning the country off oil revenues has been Iran's general policy for years. Had we adopted this policy, we might have been in a better position now. The Leader has called for structural reforms in the budget. Overhauling the budget would remain a distant possibility if we fail to introduce reforms under the current circumstances. It is our habit to do such work [like introducing reforms] under difficult conditions. The time is right for reforms now. The country’s budget house should be put in order,” he concluded.

Growing Budget Deficit

The Central Bank of Iran's latest budgetary report shows Iran’s budget deficit came in bigger than expected in the seven months of the current fiscal year (March 21-Oct. 22) to reach 391.4 trillion rials ($3.87 billion).

The shortfall was larger than the budget law’s forecast of 190.9 trillion rials ($1.89 billion) for the seven-month period and is 74.8% more compared to the deficit in last year's corresponding period.

CBI's previous budgetary report showed the deficit stood at 372.3 trillion rials ($3.68 billion) in the first half of the current year (March 21-Sept. 22).

The latest report also shows the government sold 42.7% more bonds—a total of 498.2 trillion rials ($4.93 billion)—in the seven-month period compared with the corresponding period of last year to cover its widening budget deficit.

The government’s overall revenues during the seven months under review amounted to 415.7 trillion rials ($4.11 billion), indicating a rise of 25.8% year-on-year, while its spending hit 807.2 trillion rials ($7.99 billion) to register a 45.6% growth YOY.

The Plan and Budget Organization of Iran for its part unveiled the government's budget bill for the next fiscal (March 2019-20) in time on Dec. 6.

Fars News Agency reported a few days later, citing a leaked version of the bill, that the budget proposed by the government stands at 17,300 trillion rials ($170 billion), which puts it 41.5% more than the 12,225 trillion rials ($120 billion) passed into law for the current year.

"The government has taken into account restrictions on utilizing its budgetary resources in drawing up the bill, given the US sanctions against Iran," Hamid Reza Pourmohammadi, the deputy head of Plan and Budget Organization, said.

Pourmohammadi noted that the government has focused special attention on policies designed to improve Iranian people’s livelihood and healthcare, protect producers and create youth employment.

“About $14 billion have been allocated for the provision of essential goods at the foreign exchange rate of 42,000 rials per dollar. An estimated 70 trillion rials (690 million) will be earmarked to support needy households and 370 trillion rials ($3.66 billion) will be allocated to the health sector," he said.

Among key features proposed by the government in the next year’s budget bill, according to Pourmohammadi, are keeping fuel price unchanged and the dollar’s exchange rate at 58,000 rials.

"To counter US sanctions and limits on petroleum sales, PBO has decided to reduce next year’s budget reliance on oil revenues to 27% and set average oil prices at $54 a barrel, with an estimated sale of 1.5 million barrels a day," he said

"Although the parliament might set higher rates, the government cannot afford to increase wages by more than an average of 20% next year.”