The government is projecting the sales of crude oil and its derivatives to earn 6,030 trillion rials ($14.75 billion) in the budget bill for the upcoming Iranian year (March 2023-24).
President Ebrahim Raisi submitted the budget bill to the parliament on Jan. 11 about one month late, as it is due on the 15th of the ninth Iranian month every year, which fell on Dec. 6, 2022, this year.
The main figures in the bill include 19,840 trillion rials ($48.55 billion) allocated as operating budget (including revenues derived mainly from taxation and exports at the disposal of the government), plus 1,800 trillion rials ($4.4 billion) as revenues exclusively for ministries and governmental institutions, which bring the total sum of the general budget to 21,640 trillion rials ($52.96 billion).
The budget of state companies, banks and for-profit organizations has been put at 30,976 trillion rials ($75.81 billion).
All in all, the ceiling set for the government’s total budget is 52,616 trillion rials ($128.77 billion).
Notably, projected oil sale revenues constitute around 30% of the operating budget resources.
All numbers indicate a significant increase compared to those in the fiscal 2022-23 budget which, considering the high inflation rate in Iran, is not unusual.
According to Fars News Agency, the budget bill expects daily sales of 1.4 million barrels of oil at $85 per barrel.
Members of the parliament will now study the bill in a series of sessions until it is passed into law, which also needs the approval of the powerful Guardian Council, a watchdog that ensures laws are in line with the Constitution and Sharia.
Significant Growth in Energy Sector
Iran’s economy grew by 3% in the first half of the current Iranian year (March 21-Sept. 22) compared with the similar period of last year, the Central Bank of Iran said in a report released on Dec. 22.
Without taking crude oil production into account, the growth rate stands at 2.7%.
The groups categorized by the bank as “agriculture”, “petroleum”, “industries and mines”, and “services” saw their respective GDP growth rates at 1.1%, 6.6%, 3.8% and 2.6%.
The CBI report came after the Statistical Center of Iran said the economy grew by 3.3% during the same period compared with the similar period of last year.
The center says GDP growth stood at 3.4%, excluding crude oil production.
A sectoral breakdown of GDP shows agriculture registered -2.2%, industries and mines 5% and services 2.6% in growth rates during the period under review.
The “industries and mines” group includes the subcategories of “crude oil and natural gas extraction”, “other mines”, “industry”, “energy” and “construction” which registered a respective growth rate of 3.2%, 0%, 4.9%, 12.9% and -1.6%, according to SCI.
Iran’s exports of crude oil, condensates and petrochemical products hit their highest level in November 2018, when the US reimposed sanctions on the Islamic Republic’s oil industry, Oil Minister Javad Owji said.
“Iran’s oil industry is currently at the forefront of the economic war and the highest sanctions have been imposed on the industry,” Iran’s news agency ILNA quoted Owji as saying.
Iran has achieved “significant growth” in its domestic energy sector and presence in foreign markets despite the “cruel sanctions,” the minister was quoted as saying.
Despite the US sanctions on its oil and banking industry, Iran has continued to export oil since 2018, with under-the-radar shipments headed mostly to China and barter cargoes to Venezuela, according to Oilprice.com.
Iranian President Ebrahim Raisi said in November that the country’s oil exports had reached pre-sanctions levels.
Referring to the now-stalled nuclear talks, Raisi said Tehran has already expressed its stances and it is the US that must make up its mind.
Although sanctions on Iran’s oil exports remained in place, the Islamic Republic shipped more crude oil, primarily to China, in 2021 than in 2020, the US Energy Information Administration said in an overview of Iran’s oil industry published last week.
EIA estimates that Iran’s crude oil and condensate exports averaged more than 2.5 million barrels per day in 2017, the year before the United States reimposed sanctions when it fell to an average of 400,000 bpd in 2020. Iran’s exports began to rise in November 2020 and reached an average of more than 600,000 bpd in 2021 as a result of shipping more crude oil to China.
Estimates based on ClipperData show Iran’s oil exports averaged more than 700,000 bpd in the first quarter of 2022, EIA said.
Oil Revenues, Budget Deficit and Inflation
The decline in foreign-source income as a result of the shrinkage in oil income, the dependence of the budget on oil money and the addiction of the economy to the import of consumer and intermediate goods has led to government borrowing from the central bank, printing money and increasing money supply.
In doing so, the inflation increased inevitably, said Masoud Khansari, the head of Tehran Chamber of Commerce, Industries, Mines and Agriculture, in an article for the Persian economic daily Donya-e-Eqtesad.
“The way out of this vicious cycle, plaguing the economy for decades, is to end oil economy, downsize the government, delegate the work to the private sector, expand the economy and export-oriented production, and improve financial and economic discipline of the government,” he added.
He referred to the International Monetary Fund’s recently published study of inflation and its roots in Iran and said the report said inflation has been “the bane of Iran’s economy for several decades”, as it has worsened poverty and social tensions.
IMF lists various contributors to inflation in Iran, including monetary base growth. It says each percentage point increase in monetary base is equivalent to 0.5% growth in inflation.
“The sanctions have also caused the dollar exchange rate to rise, widened the budget deficit and prevented oil exports, which helped the growth of inflation. According to this report, each 1% decrease in oil exports leads to a 0.35% increase in inflation. Budget deficit exacerbates inflation as well; each 1,000 trillion rials [about $2.44 billion at current exchange rate)] worth of deficit raises inflation rate by 2%. Food, energy and transportation make up 40% of household expenses, housing 30% and other expenses account for 30% of their expenses; food and housing expenses are the main drivers of inflation,” the report said.
Tirdad Ahmadi, an economic expert, said in an article for Donya-e-Eqtesad that the budget deficit has been the focus of media attention granted the increasing pressure of sanctions on oil industry and the reduction of oil revenues in recent years because of its prominent role in triggering inflation.
“Simply put, a deficit in budget resources leads to government and state-owned companies borrowing from the Central Bank of Iran and this leads to the growth of the monetary base, money supply and ultimately inflation,” he said.
“The important point is that the inflationary cycle is not restricted to recent years; it’s 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 the central bank 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 increase in demand created in the economy via extensive imports leads to deindustrialization, which is called the Dutch disease in the economic parlance.”
Under sanctions, Ahmadi added, as the access of the government and the central bank 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; the fluctuations of 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,” he said.
