The government’s budget deficit is estimated to hit 1,800-2,000 trillion rials ($9-10 billion) by March 20, 2021, which marks the end of the current fiscal year, which is about 160 trillion rials ($800 million) a month or 40 trillion rials ($200 million) per week, the head of Tehran Chamber of Commerce, Industries, Mines and Agriculture said.
The current trend toward growth in budget deficit and money supply would bring about higher inflation rates and devaluation of local currency, together with the diminished purchasing power of households, Masoud Khansari was also quoted as saying by Tccim.ir.
Referring to the rise in money supply to 26,250 trillion rials ($131.25 billion) and monetary base to 30 trillion rials ($150 million) by March 2020, Khansari said that since the Iranian year ending March 2012, money supply and monetary base have constantly been on the rise; the size of monetary base increased by an unprecedented 2.4% each month during last year (March 2019-20).
“The growth in monetary base—part of the money supply that is highly liquid (i.e. easy to use) and includes notes and coins as well as commercial bank deposits with the central bank—since the year ending March 2018 has directly affected the general price level of goods and services,” he said.
“The Iranian economy has experienced high inflation rate at three periods of time over the past 40 years. Once in early 1995 when it registered a 48% inflation rate in the year ending March 2014 and recently in the years ending March 2019 and March 2020 with annual inflation rates at 27% and 35%.”
Khansari said the double-digit inflation rates, consecutive years of negative economic growth, the unpromising prospects for the future of the economy and the outbreak of coronavirus are the main challenges that have led to such a seesawing of price movements in the markets.
He then referred to the loop of causality between the decline in government revenues, budget deficit, the rise in monetary base and eventually high inflations, and said, “Much of the whirlpool of woes plaguing the economy will end, if the government manages to tackle the budget deficit and avoid high rates of inflation.
The TCCIM chief noted that four measures recommended to deal with these economic issues are reducing the size of the government and its expenses, opting for selling government bonds at attractive rates to people rather than borrowing from the Central Bank of Iran, boosting tax revenues by expanding the tax base and, finally, expediting initial public offerings of state-owned companies in the stock market.
Latest data released by the Statistical Center of Iran show the average goods and services Consumer Price Index in the 12-month period ending June 20 increased by 27.8% compared with the corresponding period of last year.
The consumer inflation for the month under review (May 21-June 20) registered a year-on-year increase of 22.5% compared with the similar month of the previous Iranian year.
The overall CPI (using the Iranian year to March 2017 as the base year) stood at 214.2 for the month, indicating a 2% rise compared with the month before.
CPI registered a year-on-year increase of 22.7% for urban areas and 21.1% for rural areas in the month ending June 20.
The overall CPI reached 212.8 for urban households and 221.9 for rural households, indicating a month-on-month increase of 2% and 2.2% for urban and rural areas, respectively.
SCI put average annual inflation for urban and rural areas at 27.7% and 28.2% respectively.
Parliamentary Think Tank’s Proposals
The research arm of the Iranian Parliament, Majlis Research Center, has also put forth proposals to tackle the long-ignored fiscal challenge of widening budget deficit in one of its recent reports.
MRC has also recommended that the government end the two-year-old policy of allocating subsidized foreign exchange currency for the import of essential goods and free up between 100 and 430 trillion rials (500 million-2.15 billion) from these resources.
Other solutions include transition of governmental shares in non-governmental companies, sales of public, nonfinancial assets that derive their value from physical traits like real estate and mines, selling debt bonds beyond the projected sum stipulated in the budget law, imposing tax on banking transactions, increasing value added tax rate, increasing the tax rate on stock market trades, levying tax on capital gains realized from the sales of stocks and interest income from bank deposits, capital gains tax (housing, cars, lands) and wealth tax, raising tax on unhealthy hazardous products or pollutants, eliminating tax exemption of free trade zones and special economic zones, introducing personal income tax and cancelling the agriculture sector’s tax exemption.
Stimulating production through various methods like supplying land for housing projects, increasing consumption of alternative fuels like liquefied petroleum gas and compressed natural gas, exporting gasoline, reforming the reference exchange rates of import duties, reducing tax evasion by making transactions transparent and removing unnecessary subsidies were also proposed to the government in the MRC report.
