Economist Probes Root Causes of Iran’s Soaring Budget Deficit

EghtesadOnline: Iran’s widening budget deficit, resulting mostly from fundamental budgetary issues, has raised concerns that bigger financial problems could emerge in the future for the government that is already facing serious challenges in terms of resources.

News ID: ۷۷۸۱۰۰

02 August 2017

In an editorial published in Donya-e-Eqtesad economic daily, Iranian economist Hamid Azarmand has warned about the growing gap between the government’s income and expenditure.

“Budget deficit has been increasing sharply in the past five years,” he said, adding that “volatility” and “lack of balance” in the budget reveal “a worrying trend.”

Iran’s budget deficit in the last fiscal year (March 2016-17) amounted to $7.62 billion, according to the latest data released by the Central Bank of Iran. The figure stood at $5 billion in the Iranian year to March 2016 and $3.4 billion in the year before, Financial Tribune reported.

To cover the widening deficit, the government has been issuing bonds. Iran sold $16.5 billion worth of bonds last year, indicating a 185.5% rise over the year before. The government spent $8.9 billion to buy back the bonds sold before.

“The sale of such a high volume of bonds is unprecedented,” Azarmand said.

“Even though the massive bond issuance can resolve the government’s financial problems temporarily, as a result of this policy, the administration will face problems when it comes to payback of the interests as well as buying those previously sold. This will generate ‘accumulated debt’, which will influence the CBI resources and create bigger challenges in the long run.”

Some of the main factors contributing to Iran’s budgetary woes, as enumerated by the economist, are as follows:

Low Efficiency

The government’s low efficiency, which results from the excessively big and scattered state bodies’ dominance on the economy, is the main contributing factor.

Most government bodies are facing accumulation of human resources and centralized immovable assets. There is a lack of coordination between government entities that often carry out similar tasks simultaneously.

Lack of Transparency

Lack of transparency in any kind often leads to an increase in the government’s costs.

In the public sector of Iran, balance sheets, contracts and performance reports of state bodies, municipalities, companies and other entities are rarely publicized.

This makes it difficult for watchdogs and the media to monitor the public sector’s financial track record, increasing the inefficiency of budgeting and the chances of misuse of resources.

Counterproductive Support

Counterproductive supportive policies such as cash subsidies, guaranteed purchase of agricultural products, energy subsidies and blind backing of uneconomical businesses have imposed a huge burden on the government.

This is while these policies do not have a sustainable effect on economic growth and social welfare.

Waste of Resources

in Development Projects

The ineffective allocation of resources and lack of transparency and competition in the process of choosing contractors for development projects have given rise to a massive waste of resources.

Development projects often face delays, which prolong their implementation.

Moreover, the government is grappling with mounting debt to contractors of projects that have been launched in recent years. Most of these projects have not been completed.

The budget relies mostly on oil revenues. In the past 10 years, roughly 35% of the government’s expenditure have been covered by petrodollars.

Since most of the oil revenues are dependent on external factors, including global prices, this dependency has meant unstable resources in the budget over the years. Coupled with increasing costs, shaky income has caused an imbalance between revenue and spending.