Printing Money Does Not Fix Budget Deficits

EghtesadOnline: The Central Bank of Iran is strongly opposed to the policy of printing money to plug budget holes, Abdolnasser Hemmati, the CBI boss, said.

News ID: ۷۴۷۳۱۰

12 May 2019

He said the government is stepping up efforts to find ways to improve its declining revenues, and stressed that the practice of printing money for compensating the ballooning deficit should end.

“I have a strong conviction that steering clear of printing money for plugging budget holes should remain an undisputed principle,” he wrote in an Instagram post on Friday, echoing the opinion of almost all experts that running the money printing machines round the clock does not solve all the problems.

The rare comments come amid concerns that fiscal budget is under heavy strain as the government is facing serious financial challenges due to the new US sanctions on Iran’s oil and banking sectors, Financial Tribune reported.

Wanting to cripple Iran’s economy, US President Donald Trump last May withdrew from the nuclear deal Iran had signed with the six world powers in 2015 and announced tougher sanctions against Tehran.

He reimposed the "toughest ever" sanctions against  Iran’s oil exports last November. Fearing further increase in global crude oil prices and supply shortages, the US administration granted sanction waivers for six months to eight main countries buying Iranian oil.

Exporting oil in the international market became more difficult for Iran after US refused to extend the waivers this month.

Despite that, Hemmati said the government is trying to increase its oil export.

Iran last year started a new mechanism to sell crude oil via an energy market. However, the initiative did not produce the desired results. After eight regular crude offers at the Iran Energy Exchange, only one million barrels was sold.

Despite concerted efforts to reduce dependency on oil export revenues, oil still remains the lifeblood of the economy.

The “general resources” in the budget are forecast at 4,786 trillion rials ($97 billion according to the official  USD rate and $32 billion on the open market rate), which is 5% higher compared to last year’s budget.

Oil revenues are projected at 1,370 trillion rials ($9 billion) in the current budget, which accounts for almost 36% of the government’s total revenue. Ironically, the government has increased its dependence on oil by 3% compared to the previous budget.

Experts warn that the CBI should do away with printing money as a way to compensate the government budget deficit because the policy expands the monetary base and gives rise to galloping inflation.

The Majlis Research Center, the research arm of the parliament, warned earlier that the government revenues forecast in the budget are unlikely to materialize.

The MRC told lawmakers that if they approve the budget bill in its current form, "problems in the functioning of executive bodies, people's livelihoods and fiscal discipline would be inevitable."

Cutting Spending

The CBI chief says the government should find other sources of revenue and “alternative financing” methods besides taking effective measures to cut high and rising spending.

He did not elaborate on the alternatives and the narrow pool of options available to the sanctions-hit government struggling against mounting US hostility, provocations and open economic warfare.

However, government options can include raising taxes, reducing the prohibitive subsidies, borrowing from National Development Fund of Iran, selling foreign currency in the market and energizing the bond market.

Raising taxes cannot help in the current economic conditions when the country is grappling with stagflation. Under the circumstances, the government could even decide to further cut taxes to reduce pressure on domestic manufactures, experts argue.

In an attempt to reduce fuel subsidies and augment its falling income, the government recently proposed rationing gasoline and raising fuel prices. The plan, backed by independent economists and experts, was rejected by parliament.