Iran: Private Sector Proposes Government Budget Reforms

EghtesadOnline: Tehran Chamber of Commerce, Industries, Mines and Agriculture has put forward three specific proposals for the government to carry out a structural overhaul of its budget.

News ID: ۷۴۷۹۱۱

20 July 2019

The heads of three branches of power (executive, judiciary, legislative) approved on Saturday the four main outlines of an initiative to improve budgeting and help reduce the country’s dependence on oil revenues.

“Institutional bolstering of budget, improving spending efficiency, generating sustainable revenue growth and achieving macroeconomic stability and sustainable development are the main pivots of reforms that will be introduced to the budget within nine packages,” the head of Plan and Budget Organization, Mohammad Baqer Nobakht, wrote on Twitter.

“Each package will feature short-, medium- and long-term plans and recommendations that will be weighed by special task forces from three branches of power; the Supreme Council of Economic Coordination will then be briefed on the developments,” Financial Tribune quoted him as saying.

The need for structural reform in the budget has been acknowledged for years now. However, it became more pressing last year when the United States reimposed sanctions on Iran’s oil sector that supplies a substantial percentage of the budget’s revenues.

Last month, PBO uploaded the framework of budget reforms on its website and asked for comments from experts.

The recommendations put forward by TCCIM include reforming subsidies, reducing the budget of public companies and scrapping the allocation of subsidized foreign currency to imports.

Budget deficit is projected to stand between 1,000 and 1,500 trillion rials ($8.4-$12.6 billion) this year (March 2019-20), TCCIM President Masoud Khansari said on Tuesday.

The Central Bank of Iran's latest budgetary report to date shows Iran’s budget deficit came in bigger than expected in the nine months of the last fiscal year (March 21-Dec. 21, 2018) to hit 451.1 trillion rials ($3.57 billion). The shortfall, which was larger than the budget law’s forecast of 243.9 trillion rials ($1.93 billion) for the nine-month period, registered an increase of 17% compared with the same period of the year before.

To cover the deficit, the government sold 8.7% more bonds—a total of 653.7 trillion rials ($5.17 billion)—during the period year-on-year.

The government’s overall revenues during the nine months amounted to 575.8 trillion rials ($4.5 billion), indicating a rise of 69.2% year-on-year, while its spending hit 1026.9 trillion rials ($8.13 billion) to register a 41.5% growth YOY.

The government spent 321 trillion rials (about $2.54 billion) on development projects during the nine months, posting a 6.2% growth YOY, yet lower than the objective of 468.8 trillion rials ($3.71 billion) set in the budget law.

Notably, Tax revenues were estimated to hover around 1,074.3 trillion rials ($8.5 billion), but they reached 771.2 trillion rials ($6.1 billion), registering a 12.8% increase YOY.

There are concerns related to how the government will address its substantial budget deficit: will it borrow from the central bank, issue bonds or redouble pressure on transparent, economic enterprises to raise tax revenues?

According to Khansari, the 26 articles related to budget reform published by the Plan and Budget Organization on its website are imprecise and have been already pointed out in five-year development plans and annual budgets.

They don’t appear to offer a cure for any problem, he said, noting that TCCIM has worked out three specific solutions for reforming the structure of country’s budget.

$69b in Hidden, Cash Subsidies p.a.

The government pays as much as 8,900 trillion rials ($69 billion) in hidden or cash subsidies annually, suggesting that each Iranian receives about 10 million rials ($77.5) in subsidies every month, Khansari said.

Gasoline, oil and gas account for 5,800 trillion rials ($44.96 billion) of these subsidies.

TCCIM believes that subsidies must be eliminated and instead a fraction of the freed-up resources should be paid to low-income households.

According to the International Energy Agency's latest report, Iran was the largest fossil fuel subsidizer in the world in 2018.

Having spent $69.2 billion on fossil energy consumption subsidies in 2018, Iran ranked first globally, leaving behind Saudi Arabia with $44.72 billion and China with $44.44 billion.

The volume of Iran's subsidies given to its citizens on fossil fuel, which increased 42.2% year-on-year, equals 15.3% of Iran’s GDP and 16% of total global energy subsidies.

Iran’s average subsidization rate of fossil fuels (as a proportion of the full cost of supply) was 79%. The country paid $844 fossil fuel subsidies per person in 2018.

According to IEA price data, Iran has the cheapest gasoline in the world priced at $0.3 per liter and Norway has the world’s most expensive at $1.91 per liter.

Other Fuel Subsidies

In 2018, Iran’s subsidies for natural gas consumption were at $26 billion, fossil-fuelled electricity at $16.58 billion and oil at $26.57 billion.

Iran had spent $48.66 billion on fossil-fuel consumption in 2017, including $17.89 billion on natural gas, $14.41 billion on electricity and $16.34 billion on oil.

The country also saw the largest increase in natural gas subsidies, and–together with Venezuela, Mexico, Egypt and China–was among those seeing the most significant increase in subsidies to fossil fuel-based electricity.

Besides subsidies on fuel, the Iranian government pays cash subsidies to its citizens on a monthly basis.

The "Targeted Subsidies Law" of 2010 authorized the reduction of subsidies on food and energy, and instead allowed the payment of 455,000 rials ($3.5) to each and every Iranian on a monthly basis.

The plan has been retained to date and nearly 76 million or 95.21% of Iranians currently receive the monthly grant of cash subsidies presently.

The expenditure section of "Targeted Subsidies Law" included in the current year’s budget law allows the payment of 411,000 billion rials ($3.21 billion) to monthly cash subsidies, up to 84,000 billion rials ($657.27 million) in cash payments to reduce absolute poverty and the insurance of women who are the primary breadwinners of households, 49,000 billion rials ($383.41 million) to healthcare and up to 61,450 billion rials ($480.82 million) for the Guaranteed Purchase of Wheat program and bread subsidy.

The Cabinet recently ratified the implementation of Clause 14 of the Budget Law of the Fiscal 2019-20, which pertains to the "Targeted Subsidies Law".

The decision has been communicated in a letter to the Ministry of Economic Affairs and Finance; Energy Ministry; Information and Communications Technology Ministry; Interior Ministry; and Plan and Budget Organization.

As per the directive signed by First Vice President Es’haq Jahangiri, related governmental bodies have been tasked with identifying and removing households who fall into the top three high-income deciles from the list of monthly cash subsidy receivers by Aug. 10, Mehr News Agency reported.

State-Owned Firms' Budget 3 Times Total Budget

The government’s total budget stands at 4,000 trillion rials ($31 billion) whereas the budget allotted to public companies hovers around 12,770 trillion rials ($99 billion), Otaghiranonline.ir also quoted Jahangiri as saying.

In other words, the budget governmental companies receive is three times as much as total budget. Reducing 10% of the budget of these, at time unproductive, enterprises would help solve budgetary problems.

President Hassan Rouhani submitted the budget bill to the parliament on Dec. 25, 2018. The budget bill was passed by lawmakers in 27 sessions in less than a month. Its outlines were passed on Feb. 16.

Rouhani signed into law the current fiscal year’s (March 2019-20) budget following the parliament’s approval on April 5.

General resources in the budget bill stand at 4.07 quadrillion rials ($34 billion), 5.44% bigger compared with the budget law of the fiscal 2018-19.

Subsidized Foreign Currencies Beget Corruption

Corruption, rent-seeking practices and outbound smuggling are all results of foreign currency subsidized at the rate of 42,000 rials per US dollar the government pays to import essential goods, Khansari said.

“The government needs to discard this policy. After all, official statistics show that the consumer inflation of food, including those which received subsidy, has increased by 56.6% during the month ending June 21 compared with the same period of last year whereas non-food inflation grew by 30.1%,” he added.

Referring to the pile-up of goods at customs, Khansari said, more than 4 million tons of essential goods have accumulated at Iran's ports and customs due to a number of contradictory directives issued by the government over the past year.