Addressing budget deficit and making a return to financial discipline are the main solution to inflation.
In Iran, revenues are divided into those derived from oil sales and taxes. When the government sells oil, it gives the foreign exchange income to the Central Bank of Iran and exchanges it at a determined rate in rials to pay employees. When expenses outweigh revenues, the government faces a budget deficit.
Davoud Souri, an economist, prefaced an editorial for the Persian economic daily Donya-e-Eqtesad with this note. A translation of the text follows:
At the beginning of the fiscal year, the government estimates its revenues. It predicts how much tax it will collect, or how much oil it will sell. The expenses, however, are generally certain and the government accepts a commitment to fulfill.
Over the years, a part of the income has not materialized but expenses become due. Therefore, the estimates of the current year’s budget deficit naturally increase.
In order to finance the budget deficit, the government resorts to borrowing from the central bank. The government calls on the central bank to tackle its debts with the rial it issues without having an asset or currency to back it up. Over the past years, the government has used debt instruments, i.e., it borrowed money from people by selling bonds.
The end result of these debts is that they are financed from the sources of the central bank in the form of printing new money that is synonymous with the devaluation of the money available to the people owing to the fact that no goods have entered the economy in return for the new printed money.
The depreciation of local currency occurs in two ways: one inside the country and in return for goods and services which we call inflation [the price of goods increase, and if you could buy a product yesterday with two units, today you have to pay four units for the same item, i.e., inflation]. The second is that the value of our currency decreases with the printing of money against the value of foreign currencies, i.e., the rise in exchange rate that we are familiar with and have experienced over all the past years.
In closing, the government’s budget deficit will eventually lead to inflation and increase the exchange rate, but the point is that the government expenses will be paid from people’s pockets. This is the natural course of the economy and we cannot avoid it.
Governments may be able to intervene in this process but they cannot escape it, they can only delay it. For example, when it comes to foreign currency, people assume that the government has been able to temporarily control the rate by interfering in the market and supplying its foreign currency reserves, or by limiting the import of some goods or the purchase and sale of currency. The government’s budget deficit and overspending must be financed from somewhere and what better than people’s pockets!
The government should control its expenses or forecast its revenues based on realities to control the budget deficit, but most of the time, it fails to manage its expenses. In the past few years, the Iranian government has grown in size and unfortunately, a significant part of its income goes to current expenses, including the salaries of public employees, pension funds and civil affairs. This issue has remained unchanged over time and the government has delayed finding a solution to it. As we speak, the government has reduced capital expenditure to pay its operational costs.
The government needs to reduce and change the scope of its activities and many budget allocations. Even if these budgetary headings are small, their accumulation turns out to be a big number and should be removed from the budget. In fact, there is no reason for the government to get involved in many different fields; it should reduce its involvement in order to reduce costs and inflation.
