Economy, Business And Markets

Dealing Out of Deficit

Business & Markets Desk
Dealing Out of Deficit
Dealing Out of Deficit

Oil prices have fallen off a cliff. This has raised concerns that the Iranian government could run a deficit this year. Sanctions and a faltering economy mean that if a deficit is run, the government will have to monetize it. This is a cause for alarm. Printing more money would increase pressure on an already high inflation of around 20 percent.

Crude oil prices have plunged by roughly a quarter since June, from around $115 a barrel to below $80. Iran’s revenue from crude sales dropped 30 percent, according to President Hassan Rouhani. The government earns around 60 percent of its income from selling oil. Yet, many government officials deny the possibility of a deficit arguing that Iran sells its oil three months in advance, which would postpone the effects of the bearish crude prices till next fiscal year (starting March 21), when a new budget is put in effect.

On Wednesday, Pedram Soltani, the vice president of the Iranian chamber of commerce, said, “Oil price volatility has little effect on this year’s budget.”

Yet, many believe otherwise. The current administration needs oil at around $140 to balance the profligate spending schemes — a legacy of former president Mahmoud Ahmadinejad.

Also, on Wednesday, the central bank reported that the budget had actually gone into deficit in spring (the first quarter of the fiscal year). The budget was $671.8 million in the negative and the deficit is likely to grow as government expenses were double its income. This was before the drop in oil prices.

Another effect of falling oil revenues is that it strains the central bank’s reserves. This limits the treasury’s effectiveness on setting monetary policy and, especially, its power to keep the currency stable and artificially low diminishes.

The central bank’s, read the administration’s stance on currency parity exacerbates the problem. The bank is holding the rial artificially low, which has led to an over 20 percent disparity between the dollar’s market and official exchange rates. This decreases the government’s already shrinking oil revenues in rial terms.

Then there is the matter of sanctions, which have dented oil exports and limited access to its proceeds. The sanctions have also decreased non-oil exports, taking another source of income out of the equation. Furthermore, the sanctions have limited foreign investments, namely in the oil industry whose development is capital intensive, further accelerating the fall in government income.

Thus, monetizing the deficit and keeping the currency artificially low is not the way to go. After all, monetary policy, though the quickest fix, achieves the least results. The government should order its fiscal spending and push towards structural economic reforms.