The Majlis Research Center, the influential parliamentary think tank, says the budget bill for the next fiscal year (March 2020-21) is imbued with overestimations on the revenue side.
It said the higher projections on revenues emanate from the government‘s disregard for studies done to adjust budgets in the past.
MRC ascribes the government failure to apply corrective measures to its lack of will, limited executive power and the role of lobbies and vested interests.
In the next fiscal year general revenues have been projected at 4,845 trillion rials ($37 billion as per the open market rate of USD 1= 13,000 rilas).
Of this figure, 2,610 trillion rials is supposed to be procured largely from taxation, exports and the likes, 988 trillion rials from divestiture of government-owned property and 1,247 trillion rials from selling financial assets, which would mainly involve selling bonds.
MRC outlined two diverging approaches in drafting the budget given the present economic conditions:
1. Correcting the income and expenditure projections with less dependence on oil.
2. Drafting a budget based on unreal figures and superficial projections. Although the projections wouldn’t come to pass in the latter approach, the government can make adjustments during the implementation phase.
The think tank claims the government apparently has paid less attention to the first approach and focused its energy on the second.
Taking stock of estimated revenues from oil and gas export, the think tank wonders on what grounds has the government made such projections given the tough US sanctions imposed on oil exports.
The government expects to earn $11 billion from selling one million barrels of oil a day. Citing government officials, $10.5 billion from oil revenues would be allocated to import essential goods at the subsidized rate of 42,000 rials for a dollar.
Role of Bond Market
As per the budget draft, the government expects to make 1,090 trillion rials (8.3 billion) by selling securities.
This figure is up 70% compared to the 640 trillion rials envisaged in the budget for the current fiscal year. The government plans to offer 200 trillion rials in treasury bills to settle its mountain of debt to contractors. This is 53% higher than the amount in the current budget.
Also state-owned companies can issue bonds up to 65 trillion rials to complete projects that are “economically, technically and environmentally viable”.
The bill also allows government to issue 550 trillion rials worth of Islamic bonds to meet its other spending needs. Municipalities can also issue bonds worth 50 trillion rials.
Add to this another 100 trillion rials in bonds to be issued to repay the principal and interest on bonds that mature next year. In addition, the oil and industries ministries are allowed to jointly issue bonds worth 35 trillion rials for funding development projects.
MRC says this volume of bonds could have a negative effect on their prices in the bond market and consequently increase the government’s cost of borrowing.
To avoid steep interest rate rises, the government has obliged financial entities such as banks and fixed-income funds to purchase a big portion of bonds.
As per the budget bill, fixed-income funds are obliged to allocate at least 50% of their resources to buy the Islamic bonds issued by the government.
This plan has drawn criticism on the grounds that it will limit the freedom of the funds and is incompatible with privatization norms.
Fixed-income funds are funds that invest largely or exclusively in interest-bearing bonds. Bonds make regular interest payments and are committed to redemption of the invested amount on maturity date.
