For the third year in a row, the government has proposed a tight budget, keeping spending constant in real terms.
Expenditures proposed for 2016/17 compared to the budget of the current Iranian year, as approved by the parliament, are not expected to increase in real terms (assuming a 12% inflation).
There is a small redistribution of expenditures in favor of investment: development expenditures at $19.9 billion (roughly 5% of GDP) show an increase of 5.3% in real terms.
The share of development expenditures in total spending is up from 18.5% in the 2015/16 budget law to 19.4%, which is higher than the 14.6% in 2012/13, but a far cry from the average of one-third in the mid-1990s, the period of postwar reconstruction, wrote Djavad Salehi-Isfahani in a recent article.
No doubt, with the prevailing low price of oil, public revenues are as tight as they have been in a long time. In the proposed budget, they account for 23.8% of all revenues.
During the administration of former president Mahmoud Ahmadinejad, they accounted for twice as much—53% in 2010/11. The current oil slump is reminiscent of from president Seyyed Mohammad Khatami’s first year in office, 1998, when oil prices were also at rock bottom and Iran’s oil revenues plunged to $16 billion—about the same in real per capita terms as the $24 billion anticipated for next year. But, in 1998, oil income accounted for 42% of government revenues.
For the first time in a long time, taxes account for a larger share of total government budget than oil, one-third compared to one quarter.
Could the government have stimulated the economy by spending beyond its means? The answer is: with difficulty. The item listed in the table under “sale of assets” includes the sale of public companies (under the privatization law) as well as bonds, i.e. borrowing from banks and the public.
The government is unwilling to do much of the latter because it would have to compete with unregulated financial institutions, which are paying very high rates of interest.
In recent years, the government has been quite spoiled by being able to borrow at zero interest (actually at negative 20-30% real rates because of inflation!).
According to news sites, at present, the government owes private contractors as much as $100 billion on which it pays no interest. These arrears are one of the main reasons for bad loans held by banks and the current banking crisis.
Can the nuclear deal help jumpstart the economy in this situation? Foreign inflow of direct investment, the kind that builds industrial capacity and increases production, can obviously help inject cash into the system and enable some private debtors to settle their debts with banks. However, it would not help reduce government arrears, which require new government revenue. What about the $30 billion (or more) that the central bank expects to get as its account are unfrozen?
Apparently that sum does not belong to President Hassan Rouhani’s government because its predecessor has already received the equivalent rials from the CBI and spent it. This was the reason for the quick expansion of the monetary base in 2012-13 and the skyrocketing of inflation to 35%. It is also the reason why the $30 billion are not listed as government revenue in the new budget.
What will the central bank do with that money? Most likely sell it to keep the exchange rate from rising, or lower it to unify the exchange rates.
The government should be extremely wary of a large inflow of speculative foreign money attracted by interest rates of 20-30% while inflation is around 12% and the CBI promises to keep the exchange rate stable.
Anyone with foreign currency can make a killing by converting it into rials and depositing it in an Iranian financial institution.
Let’s hope that this is not the type of investment that is filling Tehran’s hotels, because if it is, its collapse would cause a much bigger bang: It would trigger a collapse of the rial as foreign investors attempt to get their money out in a hurry.
