Head of Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIM), Masoud Khansari said he is positive about the government’s vision in drafting the 2022-23 budget.
He referred to an announcement by Plan and Budget Organization last week in which the next budget is expected to be prepared in a way that forecasted revenues would be ensured.
“Economic stability demands change in foresight and structural reforms,” Khansari told TCCIM members on Wednesday, IRNA reported.
Employing monetary policy to control the ballooning money supply and minimizing government/state interventions in the economy are two main issues the government has pledged to observe in drafting the budget for next year.
“These are the two central aspects of the budget and we hope it will be upheld.”
Khansari welcomed the government decision to stop controlling (imposing) prices, saying this would provide much-needed oxygen to the production sector.
“It is obvious that restraining prices harms the supply side and the manufacturing sectors. It is our hope that the government will be cognizant of this in real time.”
To control the monetary base, the government is required to encourage and expand implementing open market operations by the Central Bank of Iran.
OMO is used to curb high money supply arising from recurring budget deficits, and by extension, control inflation resulting form increase in broad money supply. It is a financial instrument through which central banks buy and sell securities to expand or reduce money supply.
The mechanism allows central banks to buy government bonds to increase the money base (cash reserves) and also curb inter-banking lending rates. Selling government bonds reduces the base money and raises interbank rates.
Using bonds as collateral to borrow from the CBI and regulating interbank interest rate are key elements of the OMO. The monetary tool was launched in 2020 and has been regularly implemented ever since. The CBI says it has gone a long way in mitigating the harmful effects of huge budget deficits in the past two years.
Inflation Here to Stay
Khansari singled out the unending budget deficits as the main driver of inflation and “is going to continue” until the foreseeable future.
“The government failed to realize budget revenue projections in the past six months and was forced to go to the CBI for funds,” he lamented.
Perennial budget deficits and the lack of sustainable resources to compensate deficit spending have pushed inflation to historic highs. Budget deficits inevitably cause money supply to expand and increase inflation.
Estimates by the Majlis Research Center indicate that the government is expected to run a budget deficit of 2,800 trillion rials ($10 billion) by the end of the current fiscal year (March 2021-22),
The government’s revenue forecast in the first four months of the current fiscal year was realized by nearly 46%, according to a recent MRC report.
The Rouhani administration has come under strong criticism for making ambitious and unrealistic revenue projections in the current budget.
Overreliance on financial resources of the National Development Fund of Iran (the sovereign wealth fund), jump in revenues from taxing private enterprise and unreasonable increase in funding for state/government companies (mostly loss-making) and assorted organizations have been major issues of concern ever since the budget was announced by the former administration.
