Iran Parliamentary Think Tank Warns About Sovereign Wealth Fund Future

EghtesadOnline: Share of the National Development Fund of Iran from the export of oil and natural gas derivatives are estimated in next year’s budget bill (March 2019-20) at $6.7 billion.

News ID: ۷۴۶۶۴۴

06 February 2019

The figure takes into account the cut in the share of NDFI from oil export revenue which was reduced to 20%, down from 32% in the current fiscal budget (2018-19) and 14% lower than the amount forecast in the Sixth Five-Year Economic Development Plan for next fiscal.

However, the Majlis Reach Center, the parliamentary research arm, says realizing the reduced amount (20%) of the sovereign-wealth fund’s earning is farfetched. It says the budget planners’ prediction is an “overestimation” which is unlikely to come true.

The government forecast says 1.54 million barrels of oil will be exported per day next year at $54.1 a barrel. Also, total natural gas earnings for the coming fiscal are estimated in the budget bill at $3.45 billion, according to Financial Tribune.

Taking into account the US sanctions and the ensuing hurdles to oil exports, the Majlis think tank presents its own estimation, setting daily crude oil exports at 1 million barrel, which, together with gas exports, would at best secure $4.64 billion for the NDFI.

Budget’s Second Ceiling

In next year's budget bill, funds are allocated according to priority.  In other words, the government has devised two income ceilings. The first is a higher priority that covers urgent and unavoidable spending.  Funding for the first ceiling are almost guaranteed.

The second ceiling covers low-priority government spending that will be allocated only if the revenues that have been forecast are realized – something observers are skeptical about.

In the second ceiling of the budget, the government is allowed to increase spending up to 400 trillion rials ($1.7 billion). According to the MRC, realization of the second ceiling of the budget is contingent upon extra earnings mainly from oil/gas exports, adjusting budgetary spending structures and withdrawals from NDFI.

MRC argues that if the second ceiling is to be realized, the probability of tapping into oil exports to achieve it is out of the question because prediction for the first ceiling has already been concluded to be an overestimation.

Also, the budget bill reference to “structural reforms” is at best vague and uninformative. Therefore, the NDFI would be the last resort for government to realize funds for its second ceiling.

“If half of this amount is to be secured by NDFI, close to $2.5 billion of its income next year will be reduced and in funding the other half, nothing much will be left for the rainy-day fund”, the MRC warned.

In addition, there are NDFI’s other “assignments” outlined in the budget bill to fund other projects which, according to MRC, will further drag down the sovereign-wealth fund's share in next year’s oil revenue to zilch.

“This is while the current conditions demand a more conservative approach to NDFI spending which entails saving its resources for emergencies,” the MRC said.

It criticizes the government for inserting its most urgent plans in the budget bill to be funded by the NDFI, warning that the procedure will eventually imperil the existence of the fund and deviate it from pursuing its primary goals.

The fund was initially founded to save a percentage of earnings from oil and gas sales for the welfare of future generations. However, MRC believes that the dysfunctional economic structure, politico-economic issues and declining esources in recent years has created for the NDFI more than its share of problems.

NDFI Performance

Since its birth in 2011 till last Sept., the NDFI has received appeals for funds to the tune of $40 billion. Of this amount, the allocation of $37.7 billion has been approved. Private sector projects received $22 billion, the non-governmental public organization got $15 billion, cooperatives $94 million and other assorted projects $569 million.

It is worthy of mention that ‘approving’ funding is not necessarily tantamount to their realization. Reports say payment of $16.8 billion of the total allocations has been finalized by agent banks.

Pointing to NDFI statistics, MRC refers to an additional $11.3 billion that the fund granted for national water and agriculture projects.

For funding national projects, the government withdraws directly from NDFI resources without the agency of banks.

Additionally, $3.2 billion was allocated as per the provisions of amendment to Article 52 of the Government Financial Regulations Law and another $10.8 billion went to other NDFI undertakings.

Forex Deposits

Part of NDFI resources are in foreign currency with agent banks to be allocated to relevant industrial and mining projects.  Citing the NDFI performance report, MRC says the sovereign-wealth fund’s deposit with agent banks reached $7.2 billion last September.

Rial Loans

During its seven year existence to mid-September 2018, NDFI lending in rials amounted to 315 trillion ($2.6 billion). Loans granted as per the Government's Financial Regulations Law reached 252 trillion rials ($2.1 billion) in the rial category.

Another 30 trillion rials were allocated in the framework of the law on Supporting Sustainable Development and Employment in Rural Areas. And lastly, 33 trillion rials went for projects outlined and defined by the budget laws.

Highlight: Taking into account the US sanctions and the ensuing hurdles to oil exports, the Majlis think tank presents its own estimation, setting daily crude oil exports at 1 million barrel