Domestic Economy

Budgeting Challenges

Budgeting ChallengesBudgeting Challenges

The parliament has criticized the government for not meeting its deadline of presenting its budget for the 2016-17 fiscal year (starting March 21) for review.

The government has a mandate to submit its budget budget for parliamentary review before December 6 of each year. Parliament Speaker Ali Larijani called it a legal violation in a parliamentary session on December 8.

The same evening, the government's spokesman and the man in charge of drawing up fiscal plans, Mohammad Baqer Nobakht, apologized for the delay, IRNA reported.

"We thank the parliament for pointing out the government's delay after 48 hours had passed from the deadline for presenting the budget and apologize for it," he said.

According to Nobakht, the government delayed the budget because the parliament had asked that it submit Iran's sixth five-year development plan (2016-21) along with the budget.

The parliament's newfound vigilance is unlike its lenience toward the previous government, whose budgets it passed with little scrutiny.

Fiscal spending, especially capital spending, will be squeezed, as loss of oil revenue and ongoing sanctions, as well as weak economic activity keep revenues depressed.

However, current spending will grow as the state struggles to reduce its size. Many economists say the economy needs cash to recover, which the government can ill afford under the present circumstances.

> Poor Inheritance

Iran's current economic state is the product of policies adopted by the former administration led by Rouhani's predecessor, Mahmoud Ahmadinejad, during 2005-13.

According to Hossein Abdoh-Tabrizi, an advisor of the Ministry of Roads and Transportation, the former government left Iran with 6 quadrillion rials ($166.6 billion at market exchange rate) of debt, which is over 40% of gross domestic product and a record for Iran, especially during a decade of windfall oil revenues.

Furthermore, "embezzlement soared during the former administration and severely damaged the economy," Abdoh-Tabrizi said.

The profligate policies and fraud was accompanied by sanctions, 70% currency devaluation, 1.9% and 6.6% back-to-back drops in economic output and runaway inflation peaking above 40%.

Presidential advisor Masoud Nili says it will take till 2018 for average purchasing power to recover to pre-crisis levels. That is the best-case scenario. However, with crude oil prices tumbling to seven-year lows and in all likelihood remaining there, recovery will be much slower.

> Real Depth of the Hole

However, the current state of the government's debt, much of it overdue, is unclear. Treasurer Rahmatollah Akrami said on December 5 that a preliminary report on the administration's debt was given to the Economy Minister Ali Tayyebnia to be sent to the president.

Minister of Roads and Urban Development Abbas Akhoundi says government debt is in the range of 2.5 quadrillion to 3 quadrillion rials ($69.4-83.3 billion).

The Iranian government's continuous default on its debt has crippled private sector industries and is one of the root causes of Iran's economic stagnation.

"There, [in developed economies] if the government is indebted, it also keeps its obligations," said Akrami.

Akhoundi warned that the debt should not be repaid by borrowing. Because of the 20-25% cost of money for the government, "if it raises funding through borrowing, government debt will multiply in four to five years".

"The government has to clean up its financial system, bringing down the cost of money and repay its overdue debts if it is to improve its economic performance. Structural changes in the financial system are necessary," Akhoundi said.

> Budget Debt and Taxes

The upcoming budget will raise the minimum taxable income by 13% to 156 million rials a year ($4,300) from a previous 138 million ($3,800), in the government's nod to rising cost of living.

Also, the Cabinet decided on December 6 to cap government borrowing through Mosharekat Islamic bonds—one of the 14 forms employed in Islamic financing—to 100 trillion rials ($2.77 billion). The money will have priority to finance development of Iran's joint petroleum fields and other profitable infrastructure projects, Bourse Press reported.

The Cabinet seems to have finally made up its mind about mining rights. Changing policy over mining rights has driven down miners' shares. Their earnings have eroded due to the slump in global commodity prices, sanctions hindering exports and low domestic demand.

According to Mehr News Agency, in the next year's budget, Iron ore producers' share of production, for instance, will vary depending on their investment in the production chain. The details of the policy were not cited by the news agency.