Majlis Research Center Posits Life Without Oil

EghtesadOnline: The Majlis Research Center has proposed a roadmap to help wean the economy away from oil revenues by making better use of the nation’s abilities and potential for raising income and reducing expenditure.

News ID: ۷۴۷۵۳۹

12 June 2019

The plan is of particular importance because for decades oil revenue has been the lifeblood of Iran’s economy now saddled with more than its fair share of problems, not to mention the burden of the unending US sanctions.

MRC approaches the chronic state of economic affairs from two perspectives:  The first involves measures to  zero the role of oil revenues in national budgeting. This, however, does not imply zeroing crude oil exports.

The second delineates measures to neutralize the impact of potential decline in oil exports (even zero) on the  balance of payments and possibly forex reserves, according to Financial Tribune.

Minus oil revenues in its entirety from the current fiscal budget’s general revenues, the country will face a budget deficit of 1,000 trillion rials ($8 billion) which the MRC says is not big enough given the existing economic capacities.

The influential think tank outlines 10 ways to purge the economy of unstable and regularly fluctuating oil income, assuming that each could produce 100 trillion rials on average. It says this amount is minimum and has been decided following indepth consideration of political, social, and administrative factors.

MRC says some of the plans can be implemented in the current fiscal (March 2019-20). If implemented properly, they can plug up to 60-70% of the current budget  deficit (assuming zero oil income). Other plans could deliver in the coming years but can be initiated this year.

For plans that cannot contribute to national income in the current fiscal but their capacity to do so is certain, the think tank proposes issuing special bonds dubbed “bonds for purging the economy of oil” or “[budget] restructuring bonds”.

Issuing Bonds

“We estimate that these  plans have the potential to generate  600-700 trillion rials in the current fiscal and for the remaining 300-400 trillion rials [of budget deficit], special financial-Islamic bonds backed by government assets can be issued,”  the report said.

Plans for plugging the budget holes include lifting tax exemption on raw material exports and low value added products, redefining tax rules (considering tax exemption for the production sector), removing some high decile incomes from the direct cash payment subsidies, divesting government property, redefining the price of energy carriers and enhancing productivity of the government sector.

If and when a law on oil-free budget is passed, revenues from crude oil export will be deleted from the budget and instead be deposited with National Development Fund of Iran, the sovereign wealth fund, of course after deducting the share of the National Iranian Oil Company.

NDFI resources are used to fund non-budgetary economic development projects.

The report says government property has robust capacity to help finance annual budgets. The assets comprise two groups: financial holdings and real property. Assets of the first group are estimated to be worth 800 trillion rials ($6 billion) that can be sold directly in the stock market.

However, liquidating assets of the second group would demand more complicated mechanisms.

MRC says if spending is efficiently managed, the government can save almost 170 trillion rials ($1.3 billion) by cutting 5% of its annual expenses.

Issue of Currency Repatriation

For balancing income and expenditure, the MRC has paid special attention to the repatriation of non-oil export earnings.

Referring to existing reports, it says non-oil products worth $44 billion were exported in the last fiscal and  bulk of this amount has not been repatriated so far.

Governor of the Central Bank of Iran Abdolnasser Hemmati said recently that in the previous fiscal that ended in March businesses repatriated $18.7 billion of their export earnings to the economic cycle of the country.

This is while imports were worth $42 billion in the previous fiscal, indicating $2 billion surplus. The report noted that if foreign currency repatriation commitments are upheld by exporters, earnings would be enough to pay for import bills.

The report said the government can boost revenues from repatriating non-oil export earnings up to $18 billon if exporters return 80% of their earning instead of 40%.

In addition the government can generate $5 billion and $1 billion respectively from exporting fuel and reordering the dormant tourism industry.

The estimates are based on assumptions that the government can boost fuel production by reforming consumption patterns and controlling fuel smuggling now rampant in the border regions.

Also, it is possible for the government to save $9 billion in foreign currency by curbing capital flight with the help of stringent oversight and monitoring of transactions.

Likewise, the government can further save $5 billion via 50% reduction in unofficial imports (smuggling), $ 1 billion by cutting non-essential imports, and $ 600 million via cutting foreign trips of state and government employees.

The think tank concluded by saying that realization of the abovementioned resources will lead to incomes to the tune of $40 billion -- $10 billion higher compared to the $30 billion in oil export earnings projected for this year.