Domestic Economy

Revised Budget Passed

Business & Markets Desk
Revised Budget Passed
Revised Budget Passed

The Iranian Parliament passed the government's budget for the new fiscal year (started 20 March 2016), last week.

The budget, already a stretch from the prior year, was further increased by parliament, exacerbating the current fears of fiscal deficit.

Heavily modified by the parliament from the draft President Hassan Rouhani delivered in fall, two changes in the budget regarding subsidy reforms and fuel pricing are controversial. The changes were passed despite government disapproval.

This year, the Iranian government and its subsidiary companies will have 9,785 trillion rials ($281 billion at market exchange rate) of cash to burn through, a 2.7% rise from the government's original proposal. This puts the government's budget at over 70% of Iran's gross domestic product.

The state plans to make the required extra revenue from increasing taxation efficiency, as crude oil sales—the government's main source of revenue—are expected to pick up but the slump in the oil market will keep gains minimal. However, taxes may not be enough, given the ongoing slump in economic activity, which is expected to last for the first two quarters.

Last year's $13 billion hole in government finances, as quoted by the head of Management and Planning Organization, Mohammad Baqer Nobakht, is fueling worries about how the new budget is going to work. This is especially so, if you account for the 15.6% hike in the budget compared to the previous fiscal year.

MPs have also changed the budget makeup. The government's general budget—not accounting for government companies—has been raised by 9.1% from the government's original proposal to 3,354 trillion rials ($96.5 billion). The figure has soared 22.2% from last year.

To balance out some of the increase in the general budget, MPs reduced funds available to government companies 2.7% to 6,628 trillion rials ($190 billion) from the government's proposed 6,810 trillion rials ($196 billion). Nevertheless, the new budget for companies is 10.1% more than what it was last year.

Of the 195 MPs present during the vote, 152 approved the budget, 24 opposed it and five MPs abstained. The budget law now awaits the final verification by the Guardians Council.

> Controversial Decisions

The parliament also decided to go ahead with mandating the government to cut 24 million top earners from the nationwide cash subsidy plan, as part of the new budget, which is expected to create a public backlash for the government, which had already voiced its opposition to the plan.

The government contends that the parliament's outlined criteria are flawed and cutting so many people off is impossible without lowering identification standards in the four-month deadline set by MPs.

MPs also added a mandate to the budget to revert back to fuel rationing and a dual system for pricing fuel. The government has four months to equip all vehicles with fuel cards that will allow users to use their quota at the current prices.

A liter of gasoline is currently 10,000 rials (28 cents). The government is to offer a second price for consumers exceeding the allotted quota. The second price will equal the shipping price in the Persian Gulf plus transportation, insurance and distribution costs, which would put the price of non-rationed gasoline between 35,000 and 40,000 rials, according to Gholamreza Kateb, which is almost four times the current price.

The government already planned to raise fuel prices though it had not given any specifics. However, the dual fuel pricing system was scrapped eight month ago due to its high cost of implementation and the risk of triggering corruption and smuggling.

Nobakht had said at the time that the changes earned the government 30,000 billion Iranian rials ($863 million at market exchange rate). He voiced his concerns after the revised budget was passed.

"We are against rationing and the dual pricing system for the corruption it creates," he said. "Reverting to a method we tried and was unsuccessful is not right."

All aspects of the budget will be subject to a hot debate among lawmakers, officials and analysts in the coming week.