President Hassan Rouhani criticized the parliament for tying the government’s hands on access to Iran’s sovereign wealth fund amid the financial crunch caused by lower oil revenues.
“We created the wealth fund to use it on a rainy day. Now this is our rainy day and they [the parliament] ask us to deposit [more] cash [into the fund],” the president said on Sunday.
He censured the lawmakers for their vote to increase the share of wealth fund savings from Iran’s oil and gas revenues.
Reviewing the budget bill for the new Iranian year (March 2017-18), the parliament approved a law on Sunday, which requires the government to deposit 30% of revenues earned from oil and gas exports in the National Development Fund of Iran, up from 20% as per the budget law of the current Iranian year (2016-17).
As part of the Sunday’s decisions, the MPs also permitted the government to withdraw a total of $2.3 billion from NDFI next year, more than 50% of which will go to the defense sector.
As for the rest, the government will be able to inject $200 million into the Innovation and Prosperity Fund, allocate $300 million for modernizing irrigation, invest $300 million in rural water supply schemes and their development, grant $100 million to the Islamic Republic of Iran Broadcasting (the state radio and TV body) and spend $100 million to combat dust storms in southern provinces.
Chairman of NDFI’s governing board said in October that the fund has $68 billion in assets. The reserve, which collects oil price windfalls for infrastructure investment, is dwarfed by sovereign wealth funds of Iran’s neighbors in the Persian Gulf periphery. The UAE has nearly $800 billion and Saudi Arabia has $600 billion in their respective funds.
The approved withdrawals are far from what the government needs to cover the deficit that has forced it to drastically cut spending in both state bodies and infrastructure that suffer from underinvestment and underdevelopment in the past few years.
Iran’s budget deficit for the three quarters of the current fiscal year amounted to 268.9 trillion rials ($7 billion), according to the latest data released by the Central Bank of Iran.
The deficit forced the government to cut down spending associated with the expenditures of ministries and their affiliated bodies by 216.2 trillion ($5.7 billion) during the period.
Investment in development projects was also drastically cut. About 158 trillion rials ($4 billion) were invested in development projects, roughly a third of what the government intended to spend on development projects across the country.
The government only met 58%, 68% and 39% of its projected development spending during March 2015-16, March 2014-15 and March 2013-14 respectively.
Sharpest Fall in History
“What Rouhani points out is correct,” Saeed Laylaz, senior economist close to Iran’s reformist camp, told Financial Tribune in an interview.
He added that NDFI was created in the first place to save resources when the government earns abundant revenues to use them in line with plans and needs when revenues drop.
“In recent years, government revenues saw the sharpest fall in history,” he said.
Oil revenues topped $110 billion in the Iranian year to March 2012, but the bearish crude market pushed them down to $14-15 billion in the last Iranian year (ended March 20, 2016).
“This is a rough time in terms of the government’s financial resources,” he said.
Rouhani said in his Sunday speech that, “when the government started its term, oil was sold for $108-112 per barrel. In 1394 (last Iranian year) there were months during which our oil was sold for $25 per barrel”.
Oil prices fell drastically in 2014, from over $100 per barrel to the record low of $30 in 2016, squeezing Iran’s hydrocarbon-dependent revenues.
Iran enjoyed sky-high crude prices for a few years, adjusting its spending with abundant revenues. But this posed a challenge when prices nosedived.
Other oil-producing countries recently agreed to limit production to drive up prices.
“Now that the conditions have improved, oil price has reached roughly $50 per barrel, meaning it has halved compared to the $108-112 it used to be, meaning our revenues were cut in half,” the president said.
“What did the other oil-rich countries do? The first measure they took was to tap into their reserves … Last year, Saudi Arabia used $100 billion from its wealth fund.”
Rouhani noted that Kuwait, Qatar, Azerbaijan and Russia also adopted a similar policy.
Laylaz, however, noted that the lack of resources is not the main challenge facing the economy, as “the whole economic system needs reform”.
“The economy has lost its efficiency. The government should think of a way to make the distribution of resources more efficient,” he said.
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