Q1 Data Show Gaping Hole in Gov’t Finances

The government is seemingly failing to keep its finances in order and is spending far more than it can make.

Central Bank of Iran data show a widening deficit, surge in state debt and money supply, and government estimates that are wide off the mark.

The government’s first quarter operational deficit came in more than expected in the report published by CBI on Sunday. First Vice President Es’haq Jahangiri swiftly reacted to the report and blamed the shortcomings on the large size of the government and low oil prices.

The administration overshot its own spending target by 16.7% and hit 223 trillion rials ($6.2 billion at market exchange rate) of deficit in the first quarter of 1395 (the current Iranian year that started on March 20). That is nearly half of last year’s total deficit of $13 billion, accumulated in three months.

Part of the deficit comes from lower than anticipated revenues from selling petroleum. Oil sales in the first quarter were a shocking 25.7% less than the government target. The oil ministry made 397 trillion rials ($11.1 billion) from selling petroleum during the period.

 Petrodollar Shortage

“When we were drafting the 1395 budget, we thought with the implementation of the Joint Comprehensive Plan of Action [an accord to limit Iran’s nuclear capabilities in exchange for sanctions relief that went into effect in January], our oil sales would increase and our budget would be a good one,” said Jahangiri in a conference on Tuesday, according to the Persian daily Sharq.

However, dissent among OPEC producers since 2014 has led to oversupply and low oil prices. Crude has stayed below $50 per barrel throughout 2016. Brent futures pared its losses on Wednesday, rising 0.3% to $46.30 a barrel at 0855 GMT on Wednesday.

The situation seems unlikely to change. Goldman Sachs Group Inc., the biggest Wall Street bank in commodities, said in a report to clients on Tuesday that the near-term oil “supply-demand balance is weaker than previously expected”. The bank lowered its price forecast for New York oil futures for the fourth quarter to $43 a barrel, down from $50 a barrel, Bloomberg reported.

Now, Jahangiri says of the 2,950-trillion-rial budget ($82.5 billion) the parliament ratified after adding 300 trillion rials to the government’s proposal—overspending and rosy predictions are not the domain of the government only, the parliament is in a class of its own in this matter—only 2,400 trillion rials ($67.1 billion) can be paid for by the state’s revenues and borrowing.

Even this estimate is unrealistic. While the government is low on cash, it has also had a penchant for underestimating its costs.

Jahangiri is expecting a 550-trillion-rial ($15.3 billion) deficit, while the administration has managed to rack up a deficit of 223 trillion rials in three months.

We are lucky if this year’s deficit comes lower than 800 trillion rials ($22.3 billion).

 Gov’t Investment Slashed

The shortage in funds has forced the government to abandon its investments and funnel away nearly 95% of its 195.3-trillion-rial ($5.46 billion) investment budget to cover its operational expenses, according to the Persian daily Etemad. Lower government investment in an economy dominated by the state threatens Iran’s fragile recovery.  

“The government cannot pay for construction projects and is only spending on its current expenditures,” Jahangiri told reporters.

The sheer size and role of the state in the Iranian economy and cumbersome costs of running its inefficient organizations have garnered much criticism and concern about the future.

“I think deficit from current expenses is a sort of insult,” a commercial bank executive told Financial Tribune on condition of anonymity. “We are selling capital assets [petroleum] to pay for current expenses and we cannot even cover from that source.”

 Soaring Debt

The government’s soaring operational expenditures are creating havoc everywhere. The state’s debt is also rising faster than a space rocket. The government and its companies have amassed 622 trillion rials ($17.3 billion) of debt to the CBI after a 19.7% surge in the first quarter. Their debt to financial institutions has also jumped 13% to 1,965 trillion rials ($54.9 billion) during the quarter.

The rise in deficit and the government’s mounting debt beg the question whether the administration can control its thirst for cash and act more prudently, while on one side of the political spectrum, there are some who still advocate printing money and Venezuelan-style of management as the solution to all problems.

It also highlights the administrative body’s ineptitude in planning state finances. The latter, however, is a folly of the government as a whole and not related to any president. Nevertheless, the administration of President Hassan Rouhani has done much better than its predecessor, the conservative Mahmoud Ahmadinejad, which landed Iran in this mess.