Only Development Projects to Get Oil Revenues in Iran's 2020-21 Budget

EghtesadOnline: Oil revenues are generated from selling the country’s capital assets and should be spent on augmenting capital assets, such as development projects, the head of Plan and Budget Organization, Mohammad Baqer Nobakht, said.

News ID: ۷۴۸۳۱۹

01 September 2019

“Therefore, all revenues from oil sales will be allocated to the development sector as per structural reforms in next year’s budget," he added.

Noting that current expenditures from oil revenues will be cut to zero in the next fiscal budget (2020-21), the official said, “The number of provincial development projects has increased from 76 to 86 over the past couple of years, indicating that new projects have been initiated before the completion of old ones. The disproportionate rise in the number of development projects will be avoided, as per the reforms undertaken in next year’s budget.”

Development Projects: The Budget Underdog

Successive budget deficits in Iran have taken a toll, leading to underinvestment and abandonment of many development projects, according to Financial Tribune.

Figures published by the Central Bank of Iran show the budget earmarked for the development sector has never been fully allocated in the past few years, as the government failed to materialize the revenues it predicted.

“The main reason for the government’s failure in providing resources for development is that it fails to achieve its target revenues,” Mohammad Taqi Fayyazi, an economic expert, told the Persian weekly Tejarat-e Farda.

In fact, the government only met 58%, 68% and 39% of its projected development spending during March 2015-16, 2014-15 and 2013-14 respectively, latest data show.

“Resources are allocated based on priorities. And priorities include salaries and wages of state employees and buying back issued bonds and paying their interests … What little remains goes to development projects,” Fayyazi said.

The government has a majority stake in Iran’s economy, bringing about low productivity and high costs. The biggest portion of revenues is allocated for the expenses of ministries and their affiliated companies and organizations. And the administration is unable to reduce most of this.

“Every budget bill has fixed and flexible parts,” Fayyazi said. “A smaller and more agile government means the inevitable section of the budget, including salaries and costs, is small and the flexible part is larger.”

The economic expert noted that Iran’s budget faced problems following the reduction in oil price and shrinking crude exports as a result of sanctions.

“This is while lowering costs at that point was impossible. The only way out was to cut the resources allocated to the infrastructure sector,” he said.

“About 75% of Iran’s development budget are associated with construction. If the development resources are allocated, the construction sector will thrive.”

Low infrastructure spending compounds the lingering recession in Iran’s construction sector. For years, steel, cement and construction industries have suffered a prolonged slowdown due to a drop in demand.

Fayyazi further said that due to limited liquidity, the government has failed to pay its liabilities to contractors whose influence on the economy has been shrinking in the past few years.

Most of the debt is due to a large number of unfinished infrastructure projects, the completion of which requires tens of billions of dollars.

President Hassan 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 ($36.17 billion), 5.44% bigger compared to the budget law of the fiscal 2018-19.

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 last fiscal year (March 21-Dec. 21, 2018) to hit 451.1 trillion rials ($4 billion).

The shortfall, which was larger than the budget’s forecast of 243.9 trillion rials ($2.16 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 ($5.81 billion)—in the nine-month period compared with the corresponding period of last year.

The government’s overall revenues during the nine months amounted to 575.8 trillion rials ($5.11 billion), indicating a rise of 69.2% year-on-year, while its spending hit 1,026.9 trillion rials ($9.12 billion) to register a 41.5% growth YOY.

The government spent 321 trillion rials ($2.85 billion) on development projects during the period, posting 6.2% growth YOY, yet lower than the 468.8 trillion rials ($4.16 billion) projected in the budget.

Tax revenues were estimated to hover around 1074.3 trillion rials ($9.54 billion), but they reached 771.2 trillion rials ($6.85 billion), registering a 12.8% increase YOY.

Diversifying Resources

Nobakht stressed that the Plan and Budget Organization is focusing on diversifying sources of revenues in next year’s budget.

“New types of taxes, including tax on household income and capital gains tax, will be introduced in next year’s budget rather than placing the tax burden on production,” IRIB News quoted him as saying.

According to Mohammad Masihi, an official with the Iranian National Tax Administration, plans are underway to also levy tax on products that cause environmental damage in their manufacture or use.

As per the budget law of the current fiscal year (March 2019-20), he explained, a 2% tax will be imposed on domestically manufactured paint, coating, primer, tires, tubes, plastic and electronic toys, plastic containers, polyethylene terephthalate and melamine.

Imports of above-mentioned products will be subject to a 3% tax.

“Locally-produced light bulbs, except for SMD/LED, will be subject to a 3% tax, while a 4% tax will be charged for their imported counterparts," he saied.

“A 3% tax will be imposed on domestically manufactured computers, audiovisual equipment and cellphones as well as linoleum, cellophane and nylon. Importers of these products will be required to pay a 4% tax," he was quoted as saying by IRNA.

Nobakht put the volume of tax exemptions at more than 450 trillion rials ($4.03 billion) and said that with the approval of the Supreme Council of Economic Coordination (which consists of the heads of three branches of power) and the permission of the Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei, a considerable part of these exemptions will be eliminated.

According to INTA CEO Omid Ali Parsa, tax evasion in Iran stands at 300-350 trillion rials ($2.5-3 billion).

The Ministry of Economic Affairs and Finance estimates that tax evasion and avoidance in Iran comprises 35% of the government’s total tax revenues.

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

"The 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 in the budget within nine packages,” 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 the three branches of power; the Supreme Council of Economic Coordination will be then briefed on the developments.”

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

Recently, the Plan and Budget Organization uploaded the framework of budget reforms on its website and asked for comments from experts.

Nobakht has also been quoted as saying that the government will henceforth prepare its budget bills biennially.

According to the official, biannual budget drafting will provide a clearer image of and higher confidence about the future.