Domestic Economy

State Finances in Disarray

Business & Markets Desk
In the annual budget for the current Iranian year, the government earned 26.5% less than what it targeted during the first half of the year due to lower than expected revenues, especially those from crude oil sales
Economy Minister Ali Tayyebnia
Economy Minister Ali Tayyebnia
Taxes are bearing the brunt of government expenses, taking the lead from petroleum in a rare role reversal

Low crude prices severely restricted government revenues that fell far short of expectations in the first half of this year, raising alarms about the future growth in the economy of OPEC's No.3 exporter.

Current state revenues can barely cover operational expenditures forcing the government to severely cut back its construction projects to cope with the deficit, a central bank report on the state of Iran's finances released on Thursday showed.

In the annual budget for the current Iranian year (started March 20), the government expected to make 802 trillion rials (about $21.95 billion at market exchange rates) in the first half of the year. However, the administration earned 589 trillion rials ($16.1 billion)–26.5% less than the target–due to lower than expected revenues, especially those from crude oil sales.

The government's lower earnings are no surprise, however. Financial Tribune foresaw this trend when the budget was being drafted, which was vindicated when first quarter data showed the government had racked up almost half of last year's $13 billion deficit in just three months.

The government's fast growing deficit is mainly owed to its bulging expenses and not just its low revenues.

> Unforgiving Situation

"The administration faces tough circumstances this year and we are trying to overcome these harsh conditions using our experiences from the sanction's era and the scenarios we devised," Economy Minister Ali Tayyebnia told Mehr News Agency on Saturday.

Iran emerged from a decade of sanctions, imposed over its nuclear program, after it negotiated a deal with the P5+1—Britain, France, Germany, United States, China and Russia—that went into effect in January.

Based on the deal, Iran agreed to limit its nuclear activities in exchange for removal of sanctions.

The administration of President Hassan Rouhani had banked heavily on a flood of foreign investment and surge in crude oil revenues to boost a shrinking economy and deal with a credit crunch, due to the crisis in financial system. Both hopes were dashed.

Investment has come at a slower than anticipated pace, due to remaining US sanctions on processing dollars that were excluded from the negotiations. Petroleum revenues also disappointed, as low crude oil prices curbed gains from increased output after sanctions relief.

> More Oil, Less Money

Iran's petroleum revenues have dropped in the past three years, mainly owing to less revenue from crude oil exports, while sales of natural gas and condensates remained constant.

Iran's increasing output after sanctions was offset by low petroleum prices. The administration made 245 trillion rials ($6.7 billion) from petroleum exports—172 trillion rials ($4.7) from crude oil and 52 trillion rials ($1.42) from gas condensates and petroleum products—in the first half of the year, 35.4% less than the government's 379 trillion-rial ($10.37 billion) target in the first half of last year.

Taxes are bearing the brunt of government expenses, taking the lead from petroleum in a rare role reversal. The administration made 433 trillion rials ($11.8 billion) from direct and indirect taxation in the first half of the year, 29.6% more than the same period of a year before and 18.1% less than the government's target.

A rather insignificant financial point in the central bank's data, though a politically important one, was a 47.6% drop in tax paid by quasi-state organizations for the period compared to a year before.

President Rouhani started a campaign against these organizations last year, saying they should chip in the tax pot and stop freeloading.

These organizations, which are managed by the state but lack any oversight or control from the government or the parliament, are a force in Iran's economy, yet they pay little tax.

The government only managed to extract 100 billion rials from a planned 500 billion rials ($13.68 million) in taxes from these state organizations during the period, the central bank report showed.

The government's money shortage comes at a time of great uncertainty for Iran's future. The election of Republican Donald Trump as the 45th president of the United States on Tuesday raises concerns about the future of the global economy and the nuclear deal with Iran.

Trump criticized the nuclear deal in his election campaign and vowed to revise it once in office. He gained momentum by advocating protectionist anti-trade promises, which if carried out, will damage the global economy and with it Tehran's shaky prospects.

Add new comment

Read our comment policy before posting your viewpoints