Warning Over Iran Wealth Fund Exodus

EghtesadOnline: Majis Research Center–the in-house think tank of lawmakers–has sounded an alarm on the profligate use of the resources of the National Development Fund of Iran, the country's beleaguered sovereign-wealth fund.

News ID: ۷۸۱۰۶۷

14 January 2018

As part of its latest series of analyses related to the 2018-19 budget bill–expected to be ratified by the parliament soon–the research body warns about a dangerous pattern of withdrawal by governments from the rainy-day fund which is "altering its nature".

Dissecting next fiscal year's budget over its use of NDFI resources, MRC recalls that as per the law, the budget has envisioned that 32% of the country's earnings from oil and gas exports will be deposited in the wealth fund, but refers to the fact that 84% of these funds have already been appropriated for different purposes in the next fiscal year that starts on March 21, 2018.

Among these is the $200 million earmarked for knowledge-based companies and innovative businesses. The allocation of unspecified amounts of foreign exchange loans to upstream gas and oil development projects in the private, cooperatives and non-government public sectors comprises another section of the budget bill that has NDFI resources in sight, Financial Tribune reported.

Another section of the budget bill designates loans without a specific cap for the development of urban and road transportation projects that dip into NDFI's foreign currency coffers.

A host of other outlays that will drain the wealth-fund's resources include 40 trillion rials ($930 million) earmarked for purchasing the equipment of research laboratories for universities and higher education institutes, and $5.8 billion for the development projects of Sixth five-Year Development Plan (2017-22).

These projects range from promoting modern irrigation systems and rural water transfer projects to funding the Islamic Republic of Iran Broadcasting (IRIB) and strengthening the country's military defense.

A portion will also go to tackle the occasional sandstorms plaguing the residents of the southwestern Khuzestan Province.

Derailment

The think tank reminds legislators and policymakers that the income generated from natural resources can only lead to economic development when the negative effects of such windfalls could be staved off.

"That is why the establishment of NDFI was projected in the Fifth Economic Development Plan (2012-16) with the goal of preserving  a share of the country's oil and gas income in the form of an enduring wealth for future generations," MRC said.

Thus, the fund's own statute has put limits on the extent of employing its resources, stating that it cannot be used for expenditures and infrastructure projects  implemented by companies whose board comprises more than 20% of government officials.

Regulations also require that no more that 20% of the fund's resource will go to prop up non-government public entities. Other laws also state that all the loans should be extended in foreign exchange and the recipients are not allowed to exchange them in the domestic market.

However, as MRC points out, sporadic violations of these laws have been common in the past. From the allocation of rial loans to an overblown share of funds going to the non-government private sector–its five-year history puts that at 58%–these actions have put strains on the fund, bringing it to the brink of totally emptying its coffers.

Financial Discipline Underlined

According to the think tank, NDFI has been exploited by successive administrations that used laws and policies as pretexts to dig deep into it for mundane budget expenditures.

Another outrageous fact, MRC noted, is that governments single out their most ambitious projects from the budget and seek to fund them through NDFI.

The body urges lawmakers to curb the government's spending sprees and enforce financial discipline on the annual budget, free the funds for truly important schemes. It also apportions its share of blame on NDFI's board of trustees for their lack of spine in enforcing their own statute.

In conclusion, the Majlis Research Center calls for revoking certain sections of the 2018-19 budget, which contravene the spirit of NDFI's laws, and if any of those notes remain in place, the body urges lawmakers to map out their spending plan and the rationale for that in fine detail, so that "the economic and social benefits" of these schemes become evident.