Deliberations on Fiscal 2021-22 Budget Commence

EghtesadOnline: The Plan and Budget Organization held the first meeting of the so-called Headquarters for the Fiscal 2021-22 Budget on Saturday evening.

News ID: ۷۵۰۷۸۷

24 August 2020

PBO chief, Mohammad Baqer Nobakht, and other senior officials of the organization attended the meeting.

Discussions centered on the composition of the headquarters, the Joint Commission—a parliamentary body responsible for reviewing the budget bill as well as the five-year economic development plans—and eight specialized taskforces.

These meetings will be held regularly up until Budget Day (the day government presents its budget to the legislature for approval), i.e. Dec. 2, Mporg.ir reported.

With a freefall in oil prices and the spread of coronavirus, the government is getting more and more worked up every year, especially due to the increasing fiscal burden of sanctions and declining oil sales.

In the fiscal 2019-20, the relatively smaller size of the budget deficit, the availability of foreign exchange reserves from the National Development Fund of Iran and the untapped potential of debt bonds prevented the aftereffects of the deficit from impacting the economy.

In the current fiscal year (March 2020-21), the projected 1,500 trillion rials ($6.54 billion) in budget deficit, the 960-trillion-rial ($4.18 billion) reliance of budget on financial bonds, the drastic fall in oil prices and tax revenues and the mounting costs of coronavirus outbreak are bound to compound the government’s economic woes.

Masoud Khansari, the head of Tehran Chamber of Commerce, Industries, Mines and Agriculture, said on Tuesday the government is in the red to the tune of 1,800-2,000 trillion rials ($7.8-8.8 billion), which deficit has been partly compensated by the bond market.

Bond Issuance

The government needs to issue 1,240 trillion rials ($5.4 billion) in bonds, which is over and above the amount projected in the March 2020-21 budget, the head of the Debt Management Department of Economy Ministry said recently.

Mehdi Banani added that the government will sell 940 trillion rials ($4.2 billion) in bonds during the first half of the current fiscal year, 620 trillion rials ($2.7 billion) of which are above the figure estimated in the budget.

The government will also sell an additional 620 trillion rials before the current fiscal year is out to meet budgetary needs, ISNA reported.

Banani noted that 750 trillion rials ($3.2 billion) were generated in H1 through bond sales.

The government has said it has the go-ahead from the High Council of Economic Coordination to sell the huge volume of bonds. The policy council comprises heads of the three branches of government to address macroeconomic issues.

The Economy Ministry is now responsible for funding a large portion of the national budget because oil exports are at historic lows while spending keeps climbing with Covid-19 exacerbating the fiscal crisis.

“There are different ways of financing the budget, including cutting expenses and increasing tax revenues,” Banani said without elaborating.

Taxation

Due to the economic problems and devastating impact of the pandemic, the government’s success in raising taxes is apparently limited, as many businesses have been hit hard and many closed down.

Tax rates will increase by 28% on average in the current fiscal year (March 2019-20), the head of Iran's National Tax Administration, Omid Ali Parsa, said recently.

"In underprivileged provinces, the rate will be lower. For instance, Lorestan and Ilam will see 15% growth. However, taxes in Tehran will rise 32%," he was quoted as saying by IRNA on Thursday in a meeting with business owners in the southern Kerman Province.

"The taxation system is moving toward imposing heaviest rates on higher income deciles while minimizing levels for those with modest means."

Parsa announced that INTA earns more than 120 trillion rials ($523 million) in tax revenues (direct and indirect) on a monthly basis.

“This is while the government's general spending is at 280 trillion rials [$1.22 billion] per month,” he said.

"About 8% of the Iranians' income are put at the disposal of the government [in the form of tax]. The global average is at 30%. At a time when oil revenues have declined, the government has no choice but to count on tax revenues."

The Sixth Five-Year Development Plan (2017-22) targets an 8% share of tax revenues from GDP by March 2022, which currently stands at 6%. At present, revenues gained from tax are at least 1 quadrillion rials ($4.47 billion) behind the target set in the development plan, Fars News Agency reported.

Iran’s development plans outline government strategies in budget planning for the next five years.

Experts say the reason for this disproportion in tax revenues’ share in the country’s GDP is that some 50% of the Iranian economy enjoy tax exemption. This is worsened by rampant tax evasion and faulty taxing methods.

Gholamali Jafarzadeh Imenabadi, a member of Majlis Plan and Budget Commission, has put the size of tax evasion at 400,000 billion rials ($1.74 billion) annually.

He has been quoted as saying that the value of tax exemption and tax evasion together is more than 1,000 trillion rials ($4.36 billion).

Independent observers put the figure at much higher rates.

According to Parsa, the share of tax revenues in budget increased from 37% in the fiscal 2018-19 to 54% in the last fiscal year, Mehr News Agency reported.

“The average growth in tax revenues over the past five years was 21%,” he said.

INTA is also considering taxation on empty homes, luxury homes and pricy cars.

The Iranian Parliament on August 5 approved revisions to Article 54 of Direct Tax Code (vacancy tax), based on which empty homes in cities with a population of over 100,000 will be taxed after four months based on their assessed rental income tax on a monthly basis. The owners of these properties will have to pay six times more than the rental income tax in the first year, 12 times more than the rental income tax in the second year and 18 times more than the rental income tax in the third year and the following years.

The bill has been found to have a series of flaws by the Guardians Council—a watchdog that ensures laws are in line with the Iranian Constitution and Islamic law–and has been sent back to parliament for revision.

Parliamentary Think Tank's Remedies

The research arm of the Iranian Parliament, Majlis Research Center, has put forth solutions to tackle this long-ignored fiscal challenge in four stages in one of its recent reports.

It recommends the government to end the two-year old-policy of allocating subsidized foreign exchange currency for the import of essential goods and free up between 100 and 430 trillion rials (436 million-1.87 billion) from these resources.

Following the re-tanking of the national currency in early 2017, the government introduced stringent rules like banning the import of non-essential goods, especially those produced inside the country (known as Group IV goods).

It allocated subsidized currency at the rate of 42,000 rials to a dollar to 25 categories of goods (also known as Group I or essential goods) to help protect consumers against galloping inflation, rampant price gouging and hoarding, not to mention the high and rising cost of living.

Two other categories of imports were also defined: Group II, which mostly included raw materials, intermediate and capital goods, and Group III consisting of essential consumer goods.

Importers of products in Group II were to meet their forex requirements from the secondary forex market, known by its Persian name Nima. Importers of goods in Group III could buy hard currency from exporters who were not required to offer their forex earnings on Nima.

In the last fiscal year, the government removed five items, namely red meat, butter, pulses, tea and sugar, from the list of essential goods entitled to subsidized currency.

At present, vegetable oil, oilseeds, corn, barley, soybean meal, raw material for manufacturing tires, heavy-duty vehicle tires, paper pulp and different types of paper, are still considered essential goods.

The government has envisioned $10.5 billion for the import of essential goods this year, of which only $5 billion have been projected to be gained from oil exports. It will have to provide the remaining $5.5 billion from the secondary forex market and offer it to importers of essential goods at the rate of 42,000 rials per dollar.

Experts with MRC 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 the past two years, it would result in rent-seeking practices among importers and further weaken 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 retaining the subsidized currency policy would hover around 473 trillion rials ($2 billion) that would probably be totally met from monetary base.

Such an increase in the total amount of currency that is either 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%.

Notably, the nature of inflation coming from these two policies is different. 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 felt over subsequent years. The total termination or reduction of subsidized imports will release between 100 and 430 trillion rials (436 million-1.87 billion) for the government to help narrow the budget deficit.

The parliamentary think tank has also put forward other solutions to tackle the deficit situation, including the transfer of governmental shares in non-governmental companies, sales of public, nonfinancial assets that derive their value from 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 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, and exports of gasoline, reforming the reference exchange rates of import duties, reducing tax evasion by making transactions transparent and removing a portion of unnecessary subsidies were also proposed to the government in the MRC report.