Iran Gov’t Unveils Draft of Fiscal 2020-21 Budget Overhaul

EghtesadOnline: The government unveiled the draft plan for the overhaul of the current fiscal year’s budget law (March 2020-21) on Saturday, which “entails a major surgery of the economic and administrative systems and requires consensus”, Mohammad Baqer Nobakht, the head of Plan and Budget Organization of Iran, said on Wednesday.

News ID: ۷۵۰۱۷۵

07 June 2020

The draft will now go under the scrutiny of members of parliament before any implementation.

Economic sanctions and the 66% decline in oil revenues as well as the coronavirus outbreak and its economic fallouts have brought to fore the importance of structural reforms in the budget, which include increasing tax revenues and bond sales, and removing subsidies.

“The law allows the government to earn close to 500 trillion rials [$2.84 billion] from oil sales whereas it has to spend 800 trillion rials [$4.54 billion] on development projects. The current year’s budget is close to 5,700 trillion rials [$32.38 billion] and only 500 trillion rials or 10% of which come from oil revenues while in the past, oil accounted for 50% of budget revenues,” he was quoted as saying by Mehr News Agency.

“The government's total spending has been classified under four chapters and 10 sections in the budget law. The first section includes social welfare budget, i.e. spending on pension funds, Imam Khomeini Relief Committee, State Welfare Organization and the Foundation of Martyrs and Veterans Affairs, which accounts for as much as 1,100 trillion rials [$6.25 billion] of the country’s total budget.”

Nobakht noted that the second biggest budget spender is “education and research”, the third and fourth are “defense and security” and “health and treatment”.

“Besides oil, what resources do we have to meet these needs? A total of 13,000 trillion rials [$73.86 billion] are paid as targeted and hidden subsidies in the country. Is it possible to channel a fraction of these subsidies to the operating budget?” he asked.

Iran was the largest fossil fuel subsidizer in 2018, according to the International Energy Agency’s latest report.

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 Iranian fuel subsidies extended to its citizens, which increased 42.2% year-on-year, equaled 15.3% of Iran’s GDP and 16% of total global energy subsidies that year.

Nobakht further said that by reforming tax laws, defining new tax basis, curtailing tax evasion and reducing tax exemptions, the government can tap into tax potentials to generate revenues.

“At present, tax exemption hovers around 500 trillion rials [$2.81 billion]. Tax to GDP index in Iran is a little more than 6% compared with 20-30% in developing countries and 30-40% in industrial countries,” he said.

In late April, Omid Ali Parsa, director of Iranian National Tax Administration, said the government could see a decline of 400 trillion rials ($2.27 billion) in tax revenues as a result of the new coronavirus disease if the economic effects of the pandemic on businesses go away within a couple of months.

According to the INTA chief, under the best-case scenario, 1,400 trillion rials ($7.95 billion) out of 1,800 trillion rials ($10.22 billion) set in the budget law for tax revenues in the current year (March 2020-21) should materialize, if efforts to contain the economic impacts of the virus prove to be effective by the end of spring (June 20).

Parliamentary Think Tank on Budgetary Woes

With oil prices in freefall and the spread of coronavirus, the government will get more and more worked up this year than the last, especially due to the fiscal burden of sanctions and decline in oil sales.

In the fiscal 2019-20, the relatively smaller size of budget deficit, the availability of foreign exchange reserves from the National Development Fund of Iran and the untapped potential of debt bonds have prevented the deficit from having a strong impact on the economy.

In the current fiscal year (March 2020-21), the projected 1,500 trillion rials ($8.45 billion) in budget deficit, the 960-trillion-rial ($5.4 billion) reliance of budget on financial bonds, the drastic fall in oil prices and tax revenues, as well as the mounting costs of coronavirus outbreak are bound to compound the government’s economic woes.

The research arm of the Iranian Parliament, Majlis Research Center, has recommended the government to end the two-year-old policy of allocating subsidized foreign exchange currency for importing essential goods.

MRC’s experts believe that foreign currency exchange reserves needed for importing essential goods should be provided through the secondary forex market. The allocation of subsidized foreign currency, they say, will increase the monetary base and inflation rate. In addition, just like in the past two years, it would result in rent-seeking practices among importers and further enfeeble domestic production.

With the hypothetical 128,000 rials per dollar provided via the secondary forex market and the lack of $5.5 billion, the budget deficit coming from keeping subsidized currency policy would hover around 473 trillion rials ($2.66 billion) that would probably be totally met from the monetary base.

Such an increase in the total amount of currency that is either in general circulation in the hands of the public or in commercial bank deposits held in the Central Bank of Iran’s reserves will increase inflation by 11% in the fiscal 2020-21 whereas the abolition of subsidized imports would increase the Consumer Price Index by 6%.

Inflation resulting from terminating this expensive policy would occur once and in the form of growth in the consumer price index and changes in relative prices. But the inflation that budget deficit creates will be structural and long-term; its consequences will be held over for subsequent years. The total termination or reduction of subsidized imports will release between 100 and 430 trillion rials (563 million-2.42 billion)) for the government to help narrow the budget deficit.

The parliamentary think tank has put forward other solutions to tackle the deficit situation, including transfer of governmental shares in non-governmental companies, sales of public, nonfinancial assets that derive their value from their physical traits like real estate and mines, selling debt bonds beyond the projected sum stipulated in the budget law, imposing tax on banking transactions, increasing value added tax rate, increasing the tax rate on stock market trades, levying tax on capital gains realized from the sales of stocks and interest income from bank deposits, capital gains tax (housing, cars, lands) and wealth tax, raising tax on unhealthy hazardous products or pollutants, eliminating tax exemption of free trade zones and special economic zones, introducing personal income tax and taxing agriculture (cancelling the sector’s tax exemption).

Stimulating production through various methods like supplying land for housing projects, increasing consumption of alternative fuels like liquefied petroleum gas and compressed natural gas, exporting gasoline, reforming the reference exchange rates of import duties, reducing tax evasion by making transactions transparent and removing unnecessary subsidies were also proposed by the MRC report to the government.