Economy, Business And Markets

Tax Revenues to Outstrip Petrodollars in New Budget

Tax Revenues to Outstrip  Petrodollars in New BudgetTax Revenues to Outstrip  Petrodollars in New Budget

Iran’s economy will grow between 5-6% in the next fiscal year (starting March 20, 2016), while inflation will drop below 11%, said the government spokesperson in a press conference on Tuesday.

Mohammad Baqer Nobakht predicted that the Iranian economy will perform much better than previously anticipated.

Iran is making a fragile recovery from two years of back-to-back contraction after currency devaluation. Economists fear dipping back into recession this year.

Crude oil, Iran’s main source of revenue tumbled over 30% in the past 12 months, according to Reuters.

“The drop fueled speculation the government would be forced to curb spending. However, the 2.67-quadrillion-rial ($73 billion at the market exchange rate) budget will actually increase capital spending in a bid to support recovery,” said Mohammad Baqer Nobakht after this week’s Cabinet meeting, IRNA reported.

The figure only accounts for government expenses and leaves out the budget for government-owned companies and banks, which stood at over 6 quadrillion rials ($164.1 billion) this year.

It shows a 2% contraction from last year’s 2.74 quadrillion rials ($79.4 at average market exchange rate last December). This is while Economy Minister Ali Tayyebnia had promised an expansionary budget for next year, earlier this month.

“We cannot compare figures until the final budget is approved by the parliament. The figure announced by Nobakht may change. Also, the real figure for last year’s fiscal expenses may be lower,” central bank analyst, Pouya Jabal-Ameli told Financial Tribune in a phone interview.

The budget must be approved by the parliament before it is due to come into effect as of the beginning of the next Iranian year.

  Tax and Oil

Tax revenues are projected to become the main source of government revenue in a rare development. Taxes will increase and more companies will be eligible for taxes. The administration hopes to earn 850 trillion rials ($23.2 billion) from taxes. This is one of the few times the budget has leaned more toward tax revenues than petrodollars.

Oil sales are to add 660 trillion rials ($18 billion) to the 2016-17 budget. Oil prices edged away from multi-year lows on Tuesday as the northern hemisphere moves into the peak-demand winter season, but mild weather and ballooning supplies mean prices are expected to remain generally low well into 2016.

Iran plans to pump more crude. The Oil Ministry says it will increase output by half a million barrels per day before March 20. It also plans to increase production by 1 million barrels next year to regain market share lost to sanctions imposed on Iran’s nuclear energy program.

The sanctions are expected to be removed early 2016, as Iran fulfils its commitments to the deal made with the six world powers this July. Over $30 billion will be made available to the government for immediate usage, according to the Central Bank of Iran, which is planned to be used for jumpstarting the economy.

Nobakht noted that the government expects to run into deficit late next year.

  Foreign Exchange Rates

The government has again fixed the US dollar’s exchange rate in the budget by adopting a unified exchange rate regime with a managed float. Every dollar will be exchanged at 29,970 rials by the central bank for the government’s foreign exchange revenues and expenses.

CBI Governor Valiollah Seif has vowed to abandon its dual exchange rate regime within six months of the normalization of banking ties with the world.

On Tuesday, the bank exchanged the dollar at 30,117 rials–slightly above next year’s budget exchange rate—for importing a list of essential goods. Other consumers could buy dollars in Tehran’s market for 36,550 rials by 1147 GMT.

The unification rate is expected to settle between 33,000 and 37,000 rials, well above the government’s 2016-17 budget rate.

“The government is determined to prevent foreign exchange fluctuations,” Nobakht said. “With this exchange rate, the administration is showing it is not pursuing rial’s devaluation.”

If Nobakht is hinting at the unification exchange rate for the dollar, overall supply and demand along with the central bank’s market actions will have to bring down the market rate by nearly 22%.

That will wear down the bank’s reserves and also make exports less competitive and severely cut corporate earnings.