Budgetary Inflation Imperative

EghtesadOnline: The 70% increase in value added tax, the change in its calculation basis for imports and the rise in fuel prices for industries have inflated the fiscal 2022-23 budget, said the head of the Research Center of Iran Chamber of Commerce, Industries, Mines and Agriculture.

News ID: ۷۸۷۶۳۱

15 January 2022

President Ebrahim Raisi submitted the fiscal 2022-23 budget bill to parliament on Dec. 12 and the Iranian Parliament approved the bill’s outlines on Sunday.

The Majlis Joint Commission examining the budget’s details is a parliamentary body responsible for reviewing the budget bill as well as five-year development plans proposed by the government before it is put to a legislative vote.

Noting that until recent years, ICCIMA was not invited to the budget headquarters and that the private sector’s opinion was not sought during the budgeting process, Mohammad Qasemi said the government has rightly aimed at increasing the share of tax revenues but what is important is how fast this policy would be implemented.

“Unfortunately, the growth rate of tax on non-governmental legal entities, i.e., a majority of private companies, has grown by 146%. We do not have the new components envisioned in the budget bill. For example, the exemption on bank deposits’ interest for legal entities has been removed. It is not clear what the government intends to gain from this source and will account for how much of that 146% growth. We expect the parliament to carefully review the fundamentals of the government’s projections and solve the overestimation problem to help improve the business environment,” he said.

In the next fiscal year (starting March 21, 2022), the operating budget (including revenues derived mainly from taxation and exports at the disposal of the government) has been projected to reach 13,720 trillion rials ($48.34 billion). Add to this, revenues earmarked for ministries and governmental institutions worth 1,332 trillion rials ($4.69 billion), which takes the total sum of the general budget to 15,052 trillion rials ($53.04 billion). In addition, the budget of state companies, banks and for-profit organizations has been put at 22,314 trillion rials ($78.63 billion).

All in all, the ceiling set for the government’s total budget is at 36,310 trillion rials ($127.94 billion), about 1,056 trillion rials ($3.72 billion) short of the general budget and that of state companies, banks and for-profit organizations combined.

The share of tax revenues from the general budget is at 5,270 trillion rials ($20.16 billion).

70% Growth in VAT

The head of ICCIMA’s Research Center said VAT has grown by nearly 70%.

“One reason behind this increase is that the government has raised next year’s exchange rate base from 42,000 rials to the open market rate. Imports are normally subject to VAT that will be adjusted according to the exchange rate. But part of that increase comes from rising inflation and economic growth. Economic growth is limited after all. Even if we assume that the economy will expand by 8% next year, as the Plan and Budget Organization has predicted, the growth in VAT revenues will mainly stem from the rise in prices of goods and services, i.e., inflation,” he was quoted as saying by Otaghiranonline.ir.

The exemption from value added tax on food and agricultural imports has been removed as of Jan. 3, 2022, Tasnim News Agency reported.

Noting that next year’s budget will drive up inflation, Qasemi said the change in the basis of VAT calculation for imports will be one of the causes of inflation next year.

“The increase in fuel price for industries projected in the budget will also raise the prices of goods and services. As a result, the production costs in the budget bill 2022-23 will increase significantly and consequently trigger consumer inflation,” he said.

“Policies stipulated in the budget bill will have indirect inflationary effects as well, such that importers have to pay both customs duties and VAT to discharge raw materials from customs. If they have to tap into their own resources, their working capital would naturally decrease. If they opt for taking out loans from banks, the financial burden of interests will be added to the cost of production.”

Oil, Gas Revenues

On budgetary figures related to oil and gas revenues next year, Qasemi said the government is following the same destructive approach of the past 50 years.

“The government has included oil and gas revenues in the budget after applying the following formula: oil price multiplied by export revenues that’s multiplied by the exchange rate. In fact, this is one of the inflation-inducing mechanisms that have been institutionalized in our budget. Once governments seek to meet their expenses, they raise the previous year budget’s exchange rate for oil revenues. The average exchange rate was set at 115,000 rials in the current year’s budget [2021-22], which the government has changed to 230,000 rials for the fiscal 2022-23 budget bill,” he said.

“On the surface, oil revenues have increased, but the fact is that such an approach is one of the sources of inflation. Although 230,000 rials per US dollar are the basis of the budget’s calculation, the government has decided to consider the same basis for calculating the customs value based on the current exchange rate. Therefore, even higher rates can be applied as well.”

The next budget expects crude oil sales to stand at 1.2 million barrels per day to earn 3,818 trillion rials ($13.45 billion) in the fiscal 2022-23, accounting for about a quarter of general budget.

Asked about the transfer of financial assets or bonds as the third source of revenues, the official said, “In the next budget, the government has explicitly reduced the issuance of bonds compared with the current year and the last. However, in two sections, the budget shows that the government is allowed to issue bonds if other projected revenues were not materialized: one is the section on oil revenues (in case the government fails to sell 1.2 million barrels of oil per day multiplied by 230,000 rials multiplied by $60) and the other is the section on the transfer of state-owned assets (in case the government fails to sell state-owned companies).:

Qasemi noted that what is very important here is that issuance of bonds to address budget deficit is not an inept approach and could be an effective mechanism to control expenses, so the government needs to correct its misunderstanding.

Termination of Subsidized Imports

On the termination of subsidized forex policy, the head of ICCIMA’s Research Center said the government needs to implement measures to offset the negative effects of ending the allocation of subsidies to import essential goods, as the measure is bound to increase the prices of essential goods such as wheat, bread, medicine, livestock feed, etc.

“ICCIMA believes that the termination of subsidies would increase the domestic production like wheat, but there should be no other restrictions on increasing production. We won’t achieve success if, for example, we discontinue the allocation of subsidies for importing medicine in the hope of boosting domestic production but fail to provide raw materials needed for production,” he added.

Notably, the lawmakers gave the green light to eliminate subsidized imports at the rate of 42,000 per dollar as of the next fiscal year (starting March 21).

The move should put a permanent end to the years-long debate on ending the increasingly costly and corruption-tainted subsidy policy.

“ICCIMA stresses that ending the subsidized forex policy is a controversial issue and the government needs to have a clear plan, meaning that the public should be convinced and the ground should first be prepared. Coordination between government organizations is of utmost importance,” he said.

“After the introduction of this reform, we need to make sure that the markets, particularly the forex market, remain stable. If the foreign exchange market receives yet another shock due to the escalation of sanctions, then the numbers that were originally intended as subsidies for the low-income deciles will no longer be enough and people will experience financial hardship.”

The government says it has allocated 1,000 trillion rials ($3.52b) to help compensate the elimination of subsidized foreign currency in the 2022-23 budget. As per the budget bill, the government will pay the $3.5 billion “to offset price rises of essential goods, pharmaceuticals, bread and guaranteed-purchase of wheat”, local media outlets reported.

Qasemi noted that despite the decision to increase the wages of employees and pensioners by 10% in the fiscal 2022-23, the government’s expenditure is likely to increase by more than 30% compared with the current year’s expenditure due to the allocation of resources to initiatives such as teachers’ ranking, raising retirement bonuses and the like.

On the establishment of “Progress and Justice Fund” envisioned in next year’s budget, the official said, “The capital expenditure budget is of importance for the private sector. Compared with the current year’s budget, CAPEX has increased considerably. But the new initiative defined as ‘Progress and Justice Fund’ is actually the same ‘Omid Entrepreneurship Fund’. Resources from taxation, Note 14 and the hike in energy prices are set to be deposited in this fund. The Provincial Development Planning Council should define a plan for the fund’s resources. This mechanism will, in fact, mark the continuation of the same incomplete and flawed mechanism that currently exists regarding civil development plans.”

NDFI’s Share of Oil, Gas Exports

As the representative of the private sector, ICCIMA believes that the government should deposit all revenues from oil and gas exports in the National Development Fund, the sovereign wealth fund of Iran whereas the government intends to deposit 20% instead of 40% of the share of the fund from oil and gas revenues and the remaining 20% are set to be spent on promoting economic growth and employment via “Progress and Justice Fund”.

“The government is recommended to seek growth and development through the same NDFI. It would be a strange move if we take money from NDFI or from the private sector, and put it in a fund controlled by the government and then expect the government to create growth and jobs. The experiences of the past five decades show that this method won’t produce the intended result,” Qasemi said.

On partnership between the private sector and the government to carry out civil development projects, the ICCIMA official said, “What was in previous budget under the title of public-private participation has been mentioned very briefly in the next year’s budget. Despite a lot of talks, legislators and policymakers have given little attention to this matter in the budget.”

Stressing that the government has contravened laws in the budget bill, including the removal of tax exemptions in free trade zones or tax concessions for raw and semi-processed exports, Qasemi said when long-term commitments are being violated easily in a one-year document, i.e. the budget, how can the private sector enter into a 20- or 30-year contract with the government based on one paragraph of the budget?

“Anyhow, it does not seem that the government’s initiatives would help develop the country’s infrastructures. An accounting view is more prevalent than the policymaking view in the fiscal 2022-23 budget bill,” he said.

“From the accounting point of view, the government was more interested in balancing the budget. Budgetary numbers were unfamiliar to me. We jokingly say that the budget has turned into a price list. People are constantly in fear about what the government is next going to increase in the budget. This is not the mission defined for the budget.”

Underling the importance of reforming the budgeting system, Qasemi said, “Both resources and expenditures must be taken into account at the same time. We need to recreate the government in the sense that overlapping assignments should come to an end. The government’s expenses should become transparent for taxpayers. On the revenues side, tax bases must expand with a scientific and accurate point of view. It was my wish to see oil revenues being completely deposited in NDFI and the government issuing bonds to tackle the budget deficit. We should have used oil income on the development of the country rather than on paying the salaries of government employees.”