The annual budget, as the most important economic and financial document of the country, has always been the subject of heated discussions and controversies.
The budget deficit has been the focus of media attention, in view of its prominent role in inflation, the increasing pressure of sanctions on oil industry and the reduction of oil revenues. A deficit in budget resources leads to government and state-owned companies borrowing from the Central Bank of Iran, which leads to the growth of monetary base, money supply and ultimately inflation.
These were stated by Tirdad Ahmadi, an economic expert, in an article for the Persian daily Donya-e-Eqtesad. A translation of the article follows:
The important point is that the inflationary cycle is not restricted to recent years; it has been going on for the past 50 years.
In the early 1970s and in the middle of the 2000s, a significant fraction of the soaring oil resources entered the budget directly. In other words, the government handed over the foreign currency it obtained from oil exports to CBI and received its rial equivalent. This financial operation increased the central bank’s foreign assets as one of the components of the monetary base.
When there are no sanctions, this cycle gives rise to the inflation of non-importable goods such as land and housing. Keeping the exchange rate stable and tackling the rise in demand created in the economy via extensive imports lead to deindustrialization, which is called the Dutch disease in economic parlance.
Sanctions Impact
Under sanctions, as the access of the government and CBI to foreign sources is limited, it is not possible to stabilize the currency rate and the price of tradable goods through imports; the government prints money via the central bank.
In fact, failing to separate foreign currency and rial in the budgeting mechanism has upset the macroeconomic environment; fluctuations in oil revenues manifest their effect on the foreign exchange rates. This vicious cycle, which gets compounded under sanctions, shows that contrary to the recent propaganda by the media — trying to blame the banking network as the only culprit of the unbridled growth of liquidity — the budgetary and extra-budgetary financial operations of the government is the main factor in creating money in the Iranian economy.
Notably, this fact does not negate the overt and covert violations of the banking network and flaws in the central bank supervision over banks.
The so-called “asset productivity” is the solution being put forward to deal with the shortage of government budget resources. The government is hard-pressed for income because of the treasury’s lack of cash but at the same time, it owns a large number of properties, land and buildings in particular. This huge wealth can finance public budget resources as well as programs to improve the livelihood and well-being of Iranian households.
Taking advantage of these resources to create cash requires careful planning, employment of capable executives and granting them legal authority and decision-making power. The sale or repurposing of assets and forging partnership with the private sector and the like can provide the government with a princely sum to address current expenses.
It should be noted that other solutions such as expanding taxation in a situation where the country has registered zero economic growth for the past 10 years cannot lead to a desirable result; without economic growth and development and given the decline in social capital, even with the assumption that the Iranian National Tax Administration would strengthen its facilities and human resources, a broad taxation won’t be possible.
Crying Need for Investment, Economic Growth
The government as a partner of businesses (in the profit they make) should aim for economic growth as the key economic variable. The most important factor in creating economic growth is investment, which has decreased sharply in recent years. The private sector does not make long-term investments due to not having a clear vision of the future of the economy and the numerous political risks involved.
The government does not allocate significant resources for an effective investment due to budget restrictions and the chances of attracting foreign investment is also very low due to sanctions. Pulling out of this situation and returning to the long-term path of growth is difficult yet possible.
It is vital to make extensive and targeted investments in the country’s public infrastructures and to modernize industries, especially the oil and power industry, from domestic and foreign sources to make up for the economic backwardness of the past years and create new capacities for growth.
Scientific and executive elites of the country need to coordinate investment, both from internal and external sources. They should firstly identify and classify the priorities of national development plans. Second, they should coordinate the mobilization of resources to be allocated to these projects via different mechanisms.
A similar structure existed in the 1950s; the economic development of the country was spearheaded by the head of the Planning Organization, Abolhassan Ebtehaj.
The main idea behind the establishment of Planning Organization then was that the ministries did not have the capability to advance the development plans and therefore, the organization itself managed construction projects. For example, it designed and implemented Khuzestan Development Plan and the Amirkabir Dam.
In the 1960s, the Ministry of Economy and the Industrial Development and Renovation Organization of Iran assumed this role. After the revolution, some development organizations, including Iranian Mines and Mining Industries Development and Renovation, known as IMIDRO, the National Petrochemical Company, MAPNA Group and PetroPars shouldered the responsibility of development, but the lack of a centralized development employer at the national level has always prevented the repeat of previous successes.
The country’s crying need for investment and economic growth is crystal clear to everyone. To get back the country’s so-called development train on track, we need to understand the importance of development and planning to achieve it. Each annual budget should represent one-fifth of the five-year development plan, as there is no meaningful link between the two. The failure to fulfill five-year development plans is rooted in targeting development without laying the tracks.
