As per the fiscal 2021-22 budget bill, the government is expecting to sell 2.3 million barrels of oil per day, the same level the country used to sell in the year ending March 2018, before the reimposition of sanctions.
“Such a reliance on oil revenues in the budget bill suggests the government’s over-optimism about the lifting of sanctions next year,” said Ali Marvi, economics professor at Allameh Tabataba'i University in a write-up for the Persian economic daily Donya-e-Eqtesad. Below is the translation of the full text:
The phrase “current critical situation” has been said and used so often by the officials that it has become hackneyed. But, seriously, the country’s economy is going through a sticky patch: high inflation rate, deep recession and widespread deprivation, while the prospects of continuity or removal of sanctions also remain unclear.
Drawing up an appropriate budget under the current conditions is no mean feat, but the path is clear:
1. Economic experts have time and again warned against augmenting the budget deficit. The failure to ward off deficit would make it probable for us to meet the same fate of Venezuela. A tight rein must be kept on government expenditures. The move to impose a 20% cap on the nominal growth of government expenditures is completely defensible. The measure would send the message that the government is serious about its inflation targeting policy.
2. In addition to carrying out belated reforms such as ending the pricing policy, the government needs to switch its subsidy allocation policy from the supply front to the demand front. The best approach would be the payment of cash subsidies, as it would create least disruption in relative prices. By using banking information, the government would be able to identify people of modest means and increase the efficiency of cash subsidy payments.
3. You can’t expect to see a boost in production and economic growth in the short run. Cash handouts to people won’t lead to a deeper budget deficit only if redistribution of wealth becomes a reality. Does the government have such an option? Fortunately, yes. It is doable through the fair redistribution of energy subsidies and termination of the cheap imports policy (allocation of foreign currency to import essential goods at the rate of 42,000 per US dollar) and paying a portion of its released resources to the have-nots. Only by doing away with the cheap import policy, as much as 1,500 trillion rials ($5.76 billion) in resources will open up.
4. Despite the severe strain that sanctions and the government’s misguided economic policies have placed on the livelihoods of people, one positive development appears to have taken place, i.e, the decline in the role of oil revenues in financing the government’s spending program. The government should make the most out of this opportunity and set the stage for making a clean breakup with foreign currency income in the budget.
Sadly, the government has not only stopped short of considering these measures in the budget bill for the next fiscal year (March 2021-22) but has also done the opposite: a 47% increase in general budget, maintaining cheap import policy, ignoring the necessity of launching an integrated energy market, lack of support for the underprivileged and retaining its high dependency on oil revenues. These are examples of the government’s negligence of the aforementioned factors.
If approved the way it is now, next year’s budget is doomed to face a deficit of 2,000-3,000 trillion rials ($7.69-11.53 billion). That would be a step closer to the nightmare of “Venezuelization” of Iran’s economy, given the fact that the government has envisioned a twofold increase in oil revenues in the next year’s budget compared with that of the current fiscal year (March 2020-21). Such a reliance on oil revenues in the bill shows the government’s optimism about the lifting of sanctions in the next year. It has projected the sale of 2.3 million barrels of oil per day, the same level the country used to sell in the year ending March 2018, before the reimposition of sanctions.
The growth in government’s expenses next year is largely due to the 25% rise in the salary of government employees. That is besides the so-called urgent 30% pay increase applied this year for civil workers. As government employees usually fall within middle-top income deciles, the inflationary consequences of such a rise would affect low-income individuals.
And finally, the return of oil revenues to the budget would, if it comes about, will give rise to the Dutch disease or an increase in monetary base by selling the central bank’s foreign assets and if does not come about, it would increase the monetary base due to the government’s budget deficit.
Under the circumstances, there is a tough task ahead for the parliament. It should not add extra expenses to the budget; rather it must cut some of the government’s expenditures. That seems unlikely on the part of the new parliament, given the background of their previous proposals.
All this comes, as we need to redress past wrongs and employ reasonable decisions in next year’s budget both for putting Iran’s economic house in order and for strengthening the country’s stance during probable future talks with the Western states.
